It’s been a relatively quiet week in the world of currencies thanks to summer doldrums in the northern hemisphere combined with a lack tradable data. Sterling has spent the week with a decidedly consolatory feel. The British Pound has been somewhat supported by distracted markets, which are busy contemplating American monetary policy.
Markets are divided about the prospect of an interest rate hike from the Federal Reserve this year, pricing in about a 50% chance of action. Hawkish observers note that the unemployment in the USA is at its lowest level since 2008 and that core inflation, which strips out volatile food & energy price contribution, is at 2% mandate levels; as such tighter policy is justified. Meanwhile detractors suggest that data is misleading and the domestic economy remains fragile. Doves are also quick to point out global risk factors, like stagnant growth, and the risks posed to the American economy. All eyes will be on Federal Reserve Chair Janet Yellen’s speech late today for a bit of guidance. Yellen is speaking at the Jackson Hole Symposium specifically on the topic of American monetary policy. With markets split, the Dollar Index, which tracks the USD against a basket of its most highly trader peers, is virtually unchanged on the week. Losses against the Dollar Bloc (AUD, CAD, & NZD) and British Pound net out gains versus The Japanese Yen and Swiss Franc.
Thanks to uncertainty surrounding USD this week, GBPUSD pressed to its highest level since the Bank of England rolled out its monetary policy bazooka on August 4th. For the first time since the referendum, the pair is on course for its second consecutive week of gains as speculators cut back on their GBP short positions. However some late week softness in the pair demonstrates a lack of conviction in the rally. Off of charts, successive peaks and troughs in trading prove lower than the ones preceding, which suggests that the broader trend remains to the downside.
Shifting to GBPEUR, following last week’s 27-month low, there has been a profit-taking driven rebound this week. However like performance against the USD, the broader Sterling trend remains to the downside. Given the Eurozone’s proximity to the UK, spillover from Brexit had previously been believed to pose a substantial economic risk to the Euro. However that spillover has not materialized and the delay in triggering Article 50 has kept the focus squarely on the British Pound, thereby sparing the Euro for the time being.
Next week we will see significant data from the UK and US, with the Eurozone somewhat taking a back seat. Thursday sees the UK’s manufacturing PMI number, with the construction counterpart published on Friday. These are forecasted at 49.0 and 46.5 respectively. Post Brexit labour statistics and retail sales have both proved surprisingly resilient. As such markets are sure to be on the lookout for a rebound from the immediate post-Brexit deterioration of PMI- July’s manufacturing PMI was the lowest since February 2013 (48.2), whilst July’s construction PMI edged down to its lowest level since June 2009 (45.9). Perhaps, if positive, this can be seen as yet more proof that the effects of Brexit are not quite as bad as first projected, it is, however, still early days.
Across the pond, next week brings a whole host of US labour data, notably Non-Farm Payrolls, unemployment rate and average earnings; all to be released on Friday. Despite lackluster figures from GDP & CPI, the labour data from the USA represents a glimmer of hope. Rather impressively, for 77 weeks straight, unemployment claims in the US have stayed below 300,000- a threshold associated with a strong labour market; this is the longest such stretch since 1973, when the labour market was significantly smaller. The US unemployment rate is around the lowest it has been since March 2008 (4.9%) and is forecasted to drop another notch to 4.8% next week. Being able to hold under the 5% milestone will be a significant sign of economic health from the US, however, given the sensitivity to interest rate expectations to this data, any miss could trigger USD weakness.
By David Starkey & Toby Whittal-Williams
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