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Last week retail sales data gave sterling the boost needed to keep the currency competitive, especially against the euro. This week, a slew of UK figures should help the pound remain on the front foot, especially if PMI data continues to suggest growth in the manufacturing, construction and service sectors remained strong. The manufacturing and construction numbers will be of particular interest as the economy continues its efforts to shift away from its dependence on the service sector. Another drop in Eurozone inflation may give sterling a helping hand as the market builds its expectations of a response from the ECB. Things will be more challenging against the greenback as the all important nonfarm payroll figure is due this Friday and is expected to provide the dollar with some momentum. This coupled with some more hawkish language from Fed Chair Yellen could give the greenback the upper hand against sterling.
Asian buyers support the euro despite the drop in Eurozone inflation
This morning Eurozone inflation figures have showed price pressures continued to ease resulting in the y/y reading dropping to 0.5%. The ECB will announce their interest rate decision on Thursday and after this below expected figure, it will be interesting to see if this has had any effect on their stance. We know from the last meeting that the governing council believe inflation will pick up but this number may be a signal that downside risks could be materialising. As a result, pressure on the ECB to act is building, but we doubt the central bank will take action just yet. Despite the unexpected weakening in price pressures, the euro has been fairly resilient thanks to the support of Asian buyers.
Other figures published throughout the week such as Service PMI figures could offer the single currency further support. Upside surprise in unemployment data will be welcomed but on the whole we expect the single currency to be more vulnerable this week.
Dollar still fighting for strength but things could change this week
For weeks the dollar has been penalised for inconsistent data as the market struggles to really get a handle on the economic situation in the US. Some more hawkish comments from Janet Yellen has helped the greenback although an encouraging employment report will definitely help provide the boost the greenback needs. If non-farm payrolls comes in above 200k we could see a shift in sentiment towards the greenback as the prospect of an earlier than expected tightening of policy builds.
There will be more than enough data releases ahead of the employment report to provide the currency with momentum including ISM Manufacturing PMI, Trade Balance and Unemployment Claims. Provided these figures hold up well, there is no reason why we cannot see cable below 1.66 and EURUSD falling below 1.37. UK PMI data will attempt to limit the dollar’s gains but with focus on the US employment report, we feel this reading will take precedence.
End of week forecast
GBP / EUR
|
1.2120
|
GBP / USD
|
1.6600
|
EUR / USD
|
1.3690
|
GBP / AUD
|
1.8100
|
Currency Analyst
