UK data releases have continued to provide upside surprise for the majority of September, keeping sterling on the front foot against the euro and US dollar. Sentiment has also improved, however the better sterling does, the more of a problem it causes for Carney. The big question is whether sterling can remain robust through this month also, or if this is too much to ask for.
Eurozone figures have been a bit more disappointing this month, and sterling has taken advantage of this, strengthening gradually as September progressed. Flash PMI data didn’t do the euro any favours either with manufacturing figures disappointing while the services figures have improved. The third consecutive win for German Chancellor Angela Merkel ensured policy consistency ultimately, benefitting the euro, although economic data must improve for the single currency to remain competitive.
September ended badly for the dollar and this month it all begins again. The Federal Reserve kept their asset purchase programme on hold for yet another month which weakened the dollar and sparked uncertainty about the strength of the US economy. Failure from the government to come to an agreement about the debt ceiling has also hurt greenback and the currency will be under huge pressure this month. Eyes will be glued on the US economic figures, although a partial shutdown may prevent important numbers such as non-farm employment data to be released. Provided US government can come to an agreement in time, and economic figures meet expectations, we may see taper talk brewing once again.
September ended badly for the dollar and this month it all begins again. The Federal Reserve kept their asset purchase programme on hold for yet another month which weakened the dollar and sparked uncertainty about the strength of the US economy. Failure from the government to come to an agreement about the debt ceiling has also hurt greenback and the currency will be under huge pressure this month. Eyes will be glued on the US economic figures, although a partial shutdown may prevent important numbers such as non-farm employment data to be released. Provided US government can come to an agreement in time, and economic figures meet expectations, we may see taper talk brewing once again.
The standard the UK has set for itself over the past month has been a relatively high one, with economic figures continuing to provide upside surprise and further suggest a robust UK recovery. The main question for the UK this month is whether this impressive stream of figures can continue. Last month we saw the unemployment rate unexpectedly fall to 7.7%, as well as the claimant count figure drop by 32.6k, a significant driver of sterling momentum. If UK figures broadly provide the upside surprise that we have seen of late, we could see sterling continue to dominate against some of its major currency partners.
The Bank of England will announce the official bank rate for October on Thursday 10th (12:00), and the markets will definitely be listening attentively to the accompanying statement (if provided). The Governor is likely to reiterate the central bank’s dovish stance, and attempt to enforce the bank’s commitment to maintaining low rates in order to support the UK recovery. What’s even more interesting is the fact that the better the UK economy does, the more pressure is applied on BoE Governor Mark Carney in relation to the forward guidance he announced a few months ago. Questions have been brewing about whether the central bank can actually keep rates at 0.50% with inflation already above the central bank target and increasing economic activity likely to increase price pressure. As long as this month’s figures outperform, the market will continue to question forward guidance so we could see sterling continue to gain gradually in October.
The Bank of England will announce the official bank rate for October on Thursday 10th (12:00), and the markets will definitely be listening attentively to the accompanying statement (if provided). The Governor is likely to reiterate the central bank’s dovish stance, and attempt to enforce the bank’s commitment to maintaining low rates in order to support the UK recovery. What’s even more interesting is the fact that the better the UK economy does, the more pressure is applied on BoE Governor Mark Carney in relation to the forward guidance he announced a few months ago. Questions have been brewing about whether the central bank can actually keep rates at 0.50% with inflation already above the central bank target and increasing economic activity likely to increase price pressure. As long as this month’s figures outperform, the market will continue to question forward guidance so we could see sterling continue to gain gradually in October.
GBP/EUR
Impressive European data has been lacking for the majority of the month, with the euro missing out on some good opportunities to strengthen against sterling. German IFO business climate figures came in below expectations and Flash Manufacturing and Services PMI showed some imbalances in the development of the euro-area. French, German and the Eurozone aggregate manufacturing figures all came in short of estimates while services figures surprised to the upside, suggesting an uneven recovery. The ECB President Mario Draghi has done little to bolster the currency as his most recent speeches have emphasized the ECB’s willingness to use any instrument necessary to defend its monetary stance. Draghi highlighted that the recovery is still fragile and therefore maintaining low rates was crucial to stabilizing the eurozone economies. The ECB seem adamant to enforce that they do not want money markets to become too enthusiastic about the progress of the eurozone and that the central bank still has tools to prevent rising borrowing costs. The market will be following this rhetoric throughout October and economic releases will also be eyeballed to see if it continues to point to an improving euro area. Italian political instability will also be a hot topic for the month as the former Prime Minister Berlusconi called for elections “as soon as possible”. This has caused uncertainty and risks euro momentum if investors become increasingly worried about politics in the region’s third biggest economy. A UK economy which is building up steam, and a US economy which is flooded with tapering speculation may cloud any developments in the eurozone and therefore limit euro gains. We have already seen this reflected though GBP/EUR highs of 1.1988 in September, levels not seen in over six months. We expect the euro to be on the sidelines against sterling this month, gaining a little momentum on the back of better data releases and positive news. If US figures show an improving economy, especially better employment figures then euro could be no match for the dollar either.
GBP/USD
The Fed talk rambles on
Last month we witnessed the dollar plummet as a result of the Fed holding stimulus constant for another month. After the announcement, various Fed members spoke and said that stronger economic signals were needed in order to warrant such an adjustment in Fed policy, in particular, more positive employment figures. Although the US unemployment rate is now down to 7.3% it was rather a result of lower labour participation than from more people finding jobs. US economic releases will be a focal point this month and as they improve, it is likely to spark tapering speculation once again, boosting dollar momentum. Non-farm employment figures and the unemployment rate due this week will be major drivers of dollar performance and could possibly set the tone for the rest of the month. Providing the possibility of a stimulus reduction remains on the table, even if it is a small taper, we should see the dollar begin to reverse losses seen last month.
However, October is also the deadline for the US government to come to a conclusion about the debt ceiling, and with the government already in partial shutdown, the release of fundamental figures such as US employment data could be hindered. With the market seeking this information in order to gauge the Federal Reserve’s next policy move the dollar will remain vulnerable at least until this is solved. The uncertainty surrounding the issue has increased demand for safe haven currencies such as the swiss franc and the yen and for now has drawn the attention away from the tapering debate.
It will be a struggle for the dollar to rebound this month, as potential sterling gains and any upbeat figures from the eurozone will attempt to limit dollar strength. As long as the budget deal is reached in time, we maintain our view that greenback will push for a modest recovery in the weeks ahead.
GBP/EUR: 1.1950
GBP/USD: 1.6025
EURUSD: 1.3425
