Can sterling remain above 1.18?
The eurozone inflation and unemployment data allowed GBPEUR to recover from levels below 1.17, to start the week above 1.18. Today, UK construction PMI beat estimates, and this has seen a slightly revival in the GBPEUR rate. Last week we saw a solid manufacturing number do little for the pound suggesting investors need more solid excuses to sell euros to see sterling really get back in its stride. The Bank of England will announce their rate decision on Thursday, and with monetary policy expected to remain on hold it is unlikely this will do much for the pound. There is plenty of downside risk against the dollar, and with fresh optimism brewing, it is possible GBP/USD could continue to trend downwards.
It’s time to let the euro take a back seat
After sessions of pushing the GBPEUR rate gradually lower, euro strength has eased, and it is now much more vulnerable that we have seen in recent weeks. The ECB rate announcement and press conference will be the key. The poor inflation figures released last week, has fuelled speculation that a rate cut may be needed in order to curb the eurozone’s problem of slowing inflation. If the ECB decide to hold rates, focus will then be on whether the central bank sees rate cuts in the future, and if not, what other tools are available. European Banks are falling short of excess liquidity and with time running out, the market will also be looking for an indication of whether these banks will be supported through another round of LTROs. For the first time in a while the euro will on the back foot, and this presents the opportunity for both sterling and dollar to dictate the direction of the GBPEUR and GBPUSD rates.
Renewed optimism supports a firmer dollar
Decent economic figures coupled with a less dovish central bank have helped the dollar start this week in better position. Whether greenback will be able to maintain these gains is largely dependent on data releases this week. Non-farm payroll is due on Friday, and economists expect this reading to show employers hired less workers before the shutdown. If this proves to be true, we may see a reversal in some of the dollar’s recent momentum as figures suggest that the pace of hiring continues to slow. After the central bank highlighted the need for more evidence to support tapering, a weak employment report even before the shutdown would rather encourage the central bank to take a slightly more dovish stance. The advanced GDP q/q reading will also be of interest, and a stronger figure here should be welcomed by the market. A dovish ECB may be enough to keep the dollar in control of EUR/USD, especially if the ECB hints that a rate cut is on the table. However, to maintain gains against sterling will be more difficult, and other economic figures such as ISM manufacturing and unemployment claims are needed to support downward movement in GBP/USD.
End of week forecast
GBP / EUR
|
1.1850
|
GBP / USD
|
1.5940
|
EUR / USD
|
1.3480
|
GBP / AUD
|
1.6820
|
Sasha Nugent
Currency Analyst
