Another week of vulnerability for sterling
Sterling looked less robust last week as a firmer euro managed to direct the rate below 1.19, and finally investors began to respond towards solid US data. This week, inflation and unemployment figures will be released and after comments from BoE member Weale regarding softer inflation, this figure will be watched carefully. Price pressures have eased significantly, and this has dampened expectations that the central bank will need to raise rates soon. Despite the pick-up in economic activity, lower inflation will allow the central bank to fulfil their commitment to maintain low interest rates in order to help absorb slack in the economy. Unemployment has been improving faster than the BoE has predicted and claimant count figures on Wednesday should also support the brighter labour market in the UK. The Bank of England will release the monetary policy minutes from their last meeting, and this should shed some more light on whether the MPC’s view about the UK has changed since the inflation report. Although it is unlikely that the MPC’s stance has changed dramatically, any significant comments here will most probably cause some volatility. Other figures such as retail sales and current account data may also offer sterling some support this week, however it will not be easy to rebound considering the heavy calendar for the eurozone and the Federal Reserve monetary policy meeting this week.
The euro bulls return
Today’s Eurozone PMI figures kick started a week packed with eurozone data. With the bullish euro investors managing to dictate trading in both EUR/USD and GBP/EUR, it doesn’t seem like things will be any different for sterling this week. The euro is still preventing the pound from driving the rate back up to 1.19 and we doubt the market will hesitate on putting more money into the euro if data provides upside surprise. It will most probably be more difficult for the euro to gain against the dollar despite some solid numbers. With the Federal Reserve’s monetary policy announcement on Wednesday, we may begin to see the single currency suffer at the hand of some investor repositioning just in case the Fed decide to surprise us with the beginning of tapering. There is more opportunity for the euro to gain against sterling this week, however if the Fed hold of tapering this month, this could provide the euro with another opportunity to drive the EUR/USD rate through 1.38.
We are beginning to see signs that the market has begun to pay more attention to the more positive US figures we have seen of late. With the Federal Reserve monetary policy announcement only days away, US data will play an even more significant role in encouraging investors to reposition their portfolios towards the dollar. Although the case for a December taper has been building, many economists believe the Fed will begin to reduce stimulus in January. Therefore, if the Fed refrains from tapering this month, we doubt the market will respond by selling the dollar as aggressively as they did in September. It is likely that the greenback will experience some temporary weakness, however investors will eventually begin to prepare for a January taper. This is a fundamental week for the dollar and direction of both EUR/USD and GBP/USD hangs in the balance of the Federal Reserve announcement on Wednesday.
End of week forecast
GBP / EUR
|
1.1855
|
GBP / USD
|
1.6250
|
EUR / USD
|
1.3720
|
GBP / AUD
|
1.8350
|
