Caxton FX Currency Blog

Scottish referendum voting balance weighs in heavily on sterling markets

GBP –  Sterling markets experienced further shifts in momentum last week, as economic data as well as external factors weighed in heavily on the currency. The highlight of the week was a survey which revealed that support for Scottish independence had risen ahead of this month's referendum. If independence is granted, there will be significant risk posed to sterling, mainly due to the economic and political uncertainty that the split will create. Sterling markets have been largely data driven over the past few months but there are clear signs that this may no longer be the case, especially in the near term, prior to the ballot in two weeks. On the data front, UK PMI data dominated the majority of the price action we saw earlier in the week. PMI manufacturing figures dropped off slightly on a monthly basis, but both PMI construction and services figures exceeded the expected level.  The BoE also decided to keep interest rates and the asset purchase target unchanged this month. Recent data out of the UK has suggested that economic recovery in the UK has continued gathering momentum, but we still expect the BoE to hold off until all the pre-crisis vulnerabilities are fixed before taking action. This week sees the release of industrial and manufacturing figures out of the UK. With the sterling downside remaining vulnerable, we could see further outflows if the figures fall short of market expectations.

USD –  US dollar markets showed further signs of strength last week as external factors weighed in heavily on the currency.  The ECB interest rate cut offered some firm support for US dollar markets, as euro bulls fled for the exits and headed for the world’s reserve currency. US dollar gains were consolidated further by manufacturing data out of the US, which showed that the manufacturing index in the nation had unexpectedly increased in August. The reading actually reached its highest level since March 2011 and came in well above the market forecast. The improvement reflected solid gains in the new orders and production indices, while the employment and supplier delivery components eased off slightly. Non-farm payroll figures did however disappoint and dropped off further from last month’s weak figures. With labour market slack remaining  a key component of the Federal Reserve’s forward guidance, it is unsurprising that we saw some US dollar gains erased. The highlight of the upcoming week is expected to be the release of consumer spending data. With any consumer data remaining a good indicator of how well an economy is progressing, we expect the release to have some impact on US dollar markets.

EUR –  The euro took a dramatic turn for the worse last week, as the ECB surprised the market and cut interest rates further. The main refinancing rate was cut by 10 basis points to 0.05%, and the deposit rate was lowered to -0.2%. ECB President Draghi said in his press conference shortly afterwards that the central bank would purchase a broad portfolio of asset-backed securities starting next month. He also revealed that the policy decision was not unanimous and that some governors wanted further action. The ECB also cut its growth and inflation forecasts, following its assessment of data over the past few months. The GDP forecast has been cut from 1.0% to 0.9% and the inflation forecast from 0.7% to 0.6% in 2014. GDP data out of both Germany and the eurozone region as a whole remained unchanged in August, offering very little support to the euro. PMI services figures also dropped off slightly but German industrial production figures managed to recover slightly. This week sees the release of German inflation figures as well as the ECB monthly report. With any form of euro optimism having been blown away, we expect the euro downside to continue remaining vulnerable moving forward.

AUD – The Australian dollar had an action packed week with the release of growth figures, trade balance data as well as RBA Governor Stevens’ speech. GDP data out of Australia revealed that the Australian economy slowed in Q2 after what was a fairly strong Q1. Australian Bureau of Statistics revealed that net exports were the main drag on growth, posting a drop of 0.9%. Retail sales figures rose for a second consecutive month in July, an optimistic sign of both consumption and economic growth in Q3. The improvement recorded in July and June combined was the strongest since the beginning of the year, indicating that ultra-low interest rates are helping to spur consumer confidence. The RBA Governor Stevens made it clear in his speech that a high exchange rate was weighing in on growth in the nation, and explained how this was likely to continue as long as Chinese growth continues showing signs of reaching the level forecasted at the start of the year. He also reiterated that despite the central bank's desire to see a dramatic drop in the unemployment rate, the RBA was willing to maintain an accommodative policy for some time moving forward.  This week sees the release of unemployment data out of the Australia. With labour market slack remaining a key concern for the RBA, we expect to see sizeable price action on the back of the release.

End of Week Forecast:

GBP/EUR – 1.2400

GBP/USD –  1.6050

EUR/USD – 1.2950

GBP/AUD –  1.7150

Kamil Amin
FX Analyst
Caxton FX