GBP Rebounds after Moody’s Downgrade, NZD and EUR Shaky after Uncertain Elections
25 September 2017 by News DeskCurrency experts FC Exchange take a look at what might impact the foreign exchange market this week, as well as reflecting on last week's events for the Australian dollar, New Zealand dollar, euro, pound, Japanese yen, and US dollar.
GBP – Moody’s downgrades UK’s credit rating
Last week
It was a politically fuelled week last week as markets anticipated Theresa May’s speech in Florence on Friday and Moody’s Analytics made the decision to downgrade Britain’s credit rating. The pound to euro (GBP/EUR) exchange rate also experienced movement on speculation regarding the weekend’s German election, which is still impacting markets now. Furthermore, North Korea concerns are still prominent amongst investors.
Theresa May’s speech caused the pound to fall on Friday as the Prime Minister stated that the UK was open to a ‘time-limited’ transition period which may mean Britain contributes to EU budgets for years after Brexit. May’s speech was underwhelming for markets with little new information making its way onto the scene.
Following May’s speech, Friday saw Moody’s downgrade the UK’s credit rating from Aa1 to Aa2, stating that Britain’s departure from the European Union was causing economic uncertainty. Moody’s believes this is negative for the economy especially when it suggests that the UK’s debt reduction plans have strayed from their course. However, Downing Street hit back at Moody’s suggesting that the Brexit assessment was ‘outdated’, creating somewhat of a public squabble.
Week ahead
The pound has begun the start of the week on a good note, shaking off losses following the Moody’s downgrade. So far in Monday’s trading, the pound is trending slightly higher against the US dollar (GBP/USD), and around 0.70% higher against the euro (GBP/EUR). Further Brexit talks are due to take place in Brussels this week which could have an impact on how the pound trades.
In terms of economic data, it’s scheduled to be a rather quiet week for the UK with just a few medium-tier releases due out, such as loans for house purchase on Tuesday and consumer confidence and house price numbers on Friday. One high-tier ecostat will be released on Friday in the form of the UK gross domestic product (GDP) figure which could create some significant market movement as growth is an area investors are interested in post-EU referendum. One of the main events this week is likely to be Bank of England (BoE) Governor Mark Carney speaking at the bank’s Independence Conference in London on Thursday. The central bank Chief has created some dramatic currency movements in the past and so investors are likely to hang on his every word. Other BoE representatives are also scheduled to speak on Friday.
EUR – German election creates uncertainty
Last week
The most significant event last week for the euro came in the form of Germany’s election. Although Angela Merkel was polled to receive the most votes to remain in power for her fourth term, there has been an uprising of populist parties in Europe this year which has created some uncertainty around voting tendencies. The election saw Merkel’s Christian democratic political alliance party and the Social Democratic Party of Germany (SPD) receive the weakest number of votes in decades and as a result, the coalition negotiations are likely to take some time.
The Alternative for Germany (AFD) party has been a rising populist threat and managed to surge to third place securing around 12.6% of the vote, and highlights that demand for political reform has reached Germany. Both the Netherlands and France saw populist party defeats this year, but at some points, the vote had been tough to call. The SPD has ruled out a coalition after receiving roughly 20.5% of the vote, and Angela Merkel’s Christian Democratic Union of Germany and Christian Social Union in Bavaria (CDU/CSU) party topped the results with approximately 33.0% of the vote. The weakened support for Angela Merkel’s party created some downward pressure on the single currency.
Week ahead
This week has begun with some more disappointing news for Germany after ecostats revealed the nation’s business confidence had dipped. Forecasts had suggested that the IFO business climate number would rise from 115.9 to 116.0, but instead, the reading fell to 115.2. This is the second consecutive month the index has declined and investors will be watching the ecostats in future to see whether it gains some stability. Later this afternoon European Central Bank (ECB) President Mario Draghi will take centre stage in Brussels with a speech that could create some market volatility. A number of other ECB representatives will also speak throughout the week and so EUR movement could be on the cards.
Germany’s inflation reading is due out on Thursday and economists expect it to hold steady at 3.1% on the year in September. The Eurozone consumer price index (CPI) will follow on Friday and forecasts suggest that a small increase from 1.5% to 1.6% could take place in the same time period. German retail sales and labour market data will also be published on Friday.
USD – Fed rate rise still on the cards
Last week
The US dollar had an interesting week; on Wednesday the Federal Reserve stated that it would start trimming its balance sheet from next month, while also indicating that another interest rate rise may be on the table for December. Fed chair Janet Yellen also addressed the recent inflation fluctuations, saying: ‘This year’s inflation shortfall is more of a mystery. I will not say that the committee clearly understands what the causes are.’ Janet Yellen is scheduled to speak again on Wednesday this week which could create some USD movement.
However, the Fed’s optimism which gave the dollar a boost began to fade as the week went on and early in Friday’s session the USD had weakened as US data failed to inspire investors. While the US manufacturing purchasing managers’ index (PMI) expanded from 52.8 to 53.0, the services sector showed further signs of weakness, falling from 56.0 to 55.1. As a result, the composite PMI slipped from 55.3 to 54.6. It’s thought that Hurricane Harvey could have created disruptions.
Week ahead
A host of US economic data is due out this week which could impact how the buck trades against other currency majors. Tuesday will see the release of US consumer confidence and new home sales numbers, followed by Yellen’s speech on inflation, uncertainty and monetary policy. Meanwhile, Wednesday will bring with it US durable goods orders and pending home sales stats, followed by the US GDP and advance goods trade balance data on Thursday. Friday will close the week with personal consumption expenditure numbers.
New Zealand dollar – Unclear election outcome dents Kiwi
The euro wasn’t the only currency to fall on political uncertainty at the start of this week, the Kiwi dollar also shed some of its value after a shaky election and unclear outcome. The weekend’s New Zealand election left investors facing uncertainty on who the next government leader will be. The National Party managed to win 58 seats of the 120 on offer in the House of Representatives, while Labour attained 45. Talks over a coalition government could take weeks and the uncertainty could continue to batter the Kiwi dollar.
Japanese yen – Abe calls snap election
The Japanese yen had a surprising start to the week after Japanese Prime Minister Shinzo Abe announced he was calling a snap election. Abe’s opposition parties have been in a shambles and the PM’s image as a strong leader has helped to bolster his popularity and ratings throughout the ongoing situation with North Korea.
Meanwhile, reports from Japan have claimed that the Abe is planning a two trillion-yen economic stimulus package which would see spending on aspects such as child care and education boosted.
Australian dollar – RBA careful with rate hike talk
Reserve Bank of Australia (RBA) Governor Philip Lowe has been treading a fine line of late, being careful to say that the central bank will not be making adjustments to its official cash rate (OCR) at any point in the short-term, while also casting warnings that higher rates would be coming in the future. The comments came last week and created Aussie weakness in the market, which was only accentuated by Australia’s largest trading partner, China, receiving a credit downgrade. Any central bank comments in the near future could create movement for the Aussie. RBA Deputy Governor Guy Debelle is due to speak on Thursday.
Disclaimer: This economic update is provided by FC Exchange a Global Reach Group Company, industry leaders in foreign exchange. Authorised affiliates are permitted to reuse content.
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