Last week’s main market driver was the decision by the Federal Reserve to keep the asset purchase program unchanged for at least another month. The shocking decision allowed sterling to run away with the trophy, and it is with that trophy that sterling begins the week. With fewer UK releases, the pound could come under pressure after recent strength. Current account figures due on Thursday (09:30) will be the main release, although CBI realised sales on Wednesday (11.00) and the Final GDP q/q reading on Thursday (09:30) could possibly provide sterling with more support. Despite poor retail sales figures, the pound has remained resilient hanging on to some good levels against both the euro and the dollar. Some MPC members are due to speak and it will definitely be interesting what they have to say about the UK economy. The PMI figures for France, Germany and the Eurozone aggregate number provided mixed results keeping sterling in charge, however good German IFO business climate numbers could attempt to push the GBP/EUR rate lower. The GBP/USD rate could also adjust downwards provided US data releases provide upside surprise.
The euro’s chance to surprise markets
Angela Merkel managed to secure her position as the German Chancellor for her third consecutive term, a historic victory. Eurozone PMI figures showed uneven development with manufacturing sectors coming in below expectations, while the services sector figures beat estimates, dampening euro momentum. These figures highlight uneven progress in the eurozone economies. German IFO data tomorrow provides another opportunity for the euro to gain. ECB President Mario Draghi is due to make a speech on this afternoon and on Friday, which will most likely have an effect on the euro, possibly providing more insight on his perspective on the Eurozone economies. Although we expect the ECB President to display some positive light on the development of the euro area, Draghi may also remind the markets that the recovery is still extremely vulnerable limiting euro upside. We could potentially see a slight reversal in the EUR/USD rate this week, however this is dependent on the performance of US indicators.
A fresh start for greenback
This week the dollar has a chance to put its nightmares of last week behind. A slew of US data releases are due which could allow the dollar to pare back some of its losses against euro and sterling. Many Fed members are due to speak this week and hopefully this will help shed some light on the central bank’s thinking behind last week’s decision to hold QE3 constant. Fed member of St Louis James Bullard has already made a statement claiming that small tapering of quantitative easing is possible next month. After the cloud the Fed pulled over the US recovery last week, this week should see evidence begin to build once again in order to warrant tapering to begin in October. Upside surprise from CB consumer confidence figures as well as strong core durable goods orders and new homes sales, would contribute to putting the dollar on the right path to rebuilding earlier strength. We expect to see the GBP/USD and EUR/USD rate retract a marginally as the week progresses.
End of week forecast
GBP / EUR
|
1.1830
|
GBP / USD
|
1.5970
|
EUR / USD
|
1.3480
|
GBP / AUD
|
1.7050
|
Sasha Nugent
Currency Analyst
Caxton FX
