Crisis in Catalonia Weakens Euro, US Dollar Strengthens, Aussie Muted02 October 2017 by FC Exchange
Exchange rate experts FC Exchange take a look at last week's currency movements and offer some insight into the week ahead.
GBP – Tory conference begins, can May gain support?
The pound managed to shake off some negative developments last week and remain rather resilient, breaking through the 1.34 barrier against the US dollar (GBP/USD) on Thursday. Sterling had initially fallen in the session after Bank of England (BoE) Governor Mark Carney spoke in London suggesting that to ‘bring inflation to target too rapidly could cause undesirable volatility.’ In addition, Carney also discussed Brexit and suggested that a new trade agreement with the EU could weaken real wages further. However, in Friday’s trading he went on to comment on interest rates and raised market hopes for an increase in November. The central bank mogul stated that rates could rise in the ‘relatively near term’ as it was time for the bank to ‘ease its foot off the accelerator.’ Investors will be looking towards the November 2nd meeting with great anticipation which could create dramatic GBP fluctuations.
Last week the pound also experienced movement as a result of Donald Tusk crushing hopes that the UK may be able to progress to trade talks in Brexit negotiations. Tusk stated that the UK hadn’t made sufficient progress yet.
This week the pound’s already under renewed pressure from the strengthening US dollar. However, the Conservative Party conference began yesterday and the four-day event may create sterling movement as economic data, political situations, and Brexit all get their time in the spotlight. The event will be interesting to see if Theresa May has the power to get the party to support her, after a disastrous election in June.
EUR – Catalonia votes overwhelmingly for independence
The euro had a poor start to last week after the German election created concerns. Angela Merkel’s party lost some support and the single currency experienced its worst day in the market this year, with GBP/EUR reaching a 10-week high. Merkel will now have to attempt to form a coalition. In addition, comments made by European Central Bank President Mario Draghi also weighed on the euro. The central banker suggested that the euro’s recent strengthening could alter the path of the ECB’s attempt to taper monetary policy.
The euro has started the week on the back foot following unrest in Catalonia over the weekend. The euro has been sought after as a newly thought of safe-haven asset following the Dutch and French elections this year which both managed to enjoy a populist defeat. The Eurozone’s new political stability has made it an appealing choice for investors amid Brexit, North Korean tensions, and a shaky US government, but last weekend showed a crack in the Eurozone’s façade. Catalonians voted in an independence referendum and the figures showed overwhelming support to leave Spain at around 90%. However, the vote had been labelled ‘illegal’ by Spain’s Prime Minister and approximately 844 people and 33 police were injured as police stole ballot papers in violent raids, but 2.26 million citizens still managed to vote. Police used batons, rubber bullets, and even dragged voters by their hair away from polling stations. This kind of political instability could weaken the euro and create fluctuations until a resolution has been reached.
It’s a rather quiet week for Eurozone data with only medium-tier releases scheduled, but ECB comments and political developments could create dramatic EUR movement. Eurozone unemployment rate data, retail sales ecostats, and the ECB’s account of the monetary policy meeting will all be revealed this week, and several ECB members are scheduled to talk at various events which markets will be closely watching.
USD – Will Yellen still be chair next year?
The US dollar was offered several opportunities to rise last week and the buck attained a month-high after Federal Reserve Chief Janet Yellen stated that she supported higher interest rates. In addition, President Trump’s statements on tax reforms also helped to buoy the greenback. However, the US dollar retreated towards the end of the week, despite positive US gross domestic product (GDP) numbers. The second quarter figure reached 3.1%, in a slight move higher than the formerly forecast 3.0%; the Q2 figure marked a two-year high.
This week begins with a stronger US dollar on account of last week’s Federal Reserve developments. News reached markets that former Morgan Stanley banker and Federal Reserve Board Governor Kevin Warsh had been interviewed for the role of Fed chair. The banker has a distaste for quantitative easing programmes and displays a hawkish attitude to markets. Current Fed Chief Janet Yellen’s term is due to expire in February 2018.
There are several pieces of high-tier US data due to make their way onto the scene this week, including unemployment rate, ISM services index, ISM employment, and ISM manufacturing data. Yellen is also scheduled to speak. If tensions in North Korea flare up again the USD could also experience some swift and sharp movements.
Japanese yen – Further BoJ easing ahead?
The Japanese yen experienced weakness against some other currency majors such as the US dollar (JPY/USD) at the start of the week as Bank of Japan committee members contemplated the possibility of further easing. Its September rate decision minutes showed that there were suggestions that ‘more easing was necessary to stimulate demand’ ahead of a sales tax increase due in October 2019.
Canadian dollar – Rate hike hopes dimmed
The Canadian dollar weakened versus the US dollar (CAD/USD) on Friday after hopes for an interest rate hike by the Bank of Canada (BOC) were quashed. Domestic data highlighted a standstill in economic growth in July, showing an unchanged reading of 0.3%. The figure came after eight consecutive months of growth. However, this week a number of high-priority Canadian ecostats are set to be released such as manufacturing, employment, and unemployment data which means there could be some interesting movement for the loonie in coming days.
Australian dollar – China data fails to boost Aussie
The Australian dollar softened to multi-week lows against some currency majors last week as investors favoured other currencies. This week the Aussie has begun trading with a muted reaction to data published over the weekend from its largest trading partner, China, which indicated that activity in its industrial and non-industrial sectors grew at the fastest pace in years in the month of September. Instead, investors have favoured the US dollar. The RBA is scheduled to make its next rate decision this week.
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