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GBP, AUD, EUR, USD, NZD, CAD in focus: UK Cabinet Reshuffle, Catalonia, German and NZ Elections Impact Currencies

10 October 2017 by FC Exchange

Politics are likley to be a big influence on the currency market this week, with the GBP, EUR, USD, and NZD exchange rates all feeling the impact of political events, while CAD and AUD experience movement on central bank expectations, say currency experts FC Exchange.

GBP – Pound starts October on the back foot

Last week

September had been an excellent month for sterling which climbed significantly against both the US dollar and euro, but October brought the currency back down to earth with the first week of the month highlighting some hefty losses in the worst week the British currency had experienced in a year. The pound stumbled last week as politics took the limelight once again. The Conservative Party has had a few rocky months since the disastrous UK snap election which has seen Theresa May grasping at power as party members undermine her and Brexit negotiations make little progress. The pound reached a four-week low against the US dollar (GBP/USD) and a three-week low versus the euro (GBP/EUR) last week as speculation circulated, and Tory MP Grant Shapps admitted he planned to place more pressure on May to host a new leadership election.

Shapps commented: ‘We did have a result that was not at all what anyone wanted, least of all what she wanted or anticipated, and… Sometimes when things happen you have to take responsibility for them. This is a view I have held for quite some time and a lot of colleagues feel the same way, including five former cabinet ministers.’ Meanwhile, Theresa May shrugged off the speculation and vowed to continue ‘with full support of cabinet’.

UK house price growth also reached an eight-month high last week marking a 4% rise in September. Furthermore, it’s thought that the possibility of a UK interest rate increase this year shouldn’t weigh on market sentiment too much, meaning the housing market could continue to strengthen.

Week ahead

The pound rebounded on Monday morning on hopes that Theresa May will assert her authority with a cabinet reshuffle with the potential of axing Boris Johnson. The ongoing political situation will continue to play its part in GBP movements, as will UK data. The UK is scheduled to release industrial production, manufacturing production, and construction output data on Tuesday, as well as trade balance stats and a September growth estimate. Wednesday will see the release of the RICS house price balance figure, followed by the influential Bank of England (BoE) Credit Conditions and Bank Liabilities Surveys on Thursday.

EUR – Catalonia pressures euro, Draghi speech ahead

Last week

The euro continued to feel the pressure of the political disruption in Catalonia last week. Speculation as to if and when Catalonia will declare independence continues to circulate after 350,000 people gathered in Barcelona at the weekend in a rally calling for Spanish unity. The results of the illegal and violent referendum last week saw Catalonians vote overwhelmingly for independence; 90% of over two million voters made the call to sever ties with Spain. It’s thought if independence is declared, Article 155 could be invoked which would see the Spanish government in Madrid withdraw Catalonia’s autonomy in part, or entirely. This has never happened before, and it could create further political turmoil for the nation which wouldn’t bode well for the euro. Alternatively, martial law or a state emergency could be declared, although this is probably one of the least likely options. Negotiations could also be an alternative, although Spanish Prime Minister Mariano Rajoy has stated that he will not discuss the referendum.

Week ahead

This week began with the German industrial production figure making a marked improvement in August, jumping by 2.6% on the month, while the annual figure improved to 4.7%. Economists had predicted an annual slowdown from 4.2% to 3.0%. However, it’s expected to be a relatively quiet week ahead for the single currency regarding other economic data, with only a few medium-tier releases due out. Tuesday will see the release of German trade balance data, followed by Eurozone industrial production on Thursday and German inflation on Friday. However, two European Central Bank (ECB) officials, one of which being President Mario Draghi, are scheduled to speak this week, and their comments could create repercussions for the euro exchange rate.

USD – US jobs decline for first time in seven years

Last week

Last week highlighted the effect Hurricanes Harvey and Irma had on the US economy, with the highly influential non-farm payrolls stat noting a 33,000 fall – its first drop in seven years. Companies put hiring on hold and workers were displaced following the event, and the leisure and hospitality sectors noted a record fall. Economists had expected 80K growth. Surprisingly, unemployment dropped to 4.2% from 4.4% in September despite the contraction in job creation. Additionally, wages noted their most significant increase since December. Hopes for an interest rate hike this year are still high after the US Federal Reserve reassured the market that it would look through economic disruptions caused by the hurricanes.

Week ahead

Although the week begins on a subtle note, the middle and close of the week should see things heat up for the US dollar concerning economic data. Wednesday will see the Federal Open Market Committee (FOMC) meeting minutes published from the September 20th meeting, followed by weekly labour market data on Thursday. However, Friday will see US inflation numbers published, alongside average weekly earnings, advance retail sales numbers, and the University of Michigan confidence index. Friday’s ecostats could create some dramatic market movement, and investors will be keeping a close eye on comments from Fed representatives expected to speak throughout the week.

 

NZD – Markets await coalition announcement

The New Zealand dollar began the week trending in the region of four-month lows following the final vote count for the nation’s recent election still showing no clear winner. The election-related uncertainties have created downward pressure on the Kiwi dollar and markets await the composition of the coalition this week which is likely to create further fluctuations. The National party has 56 seats, while the Labour and Green party combined have 54 seats. Therefore, both are courting the New Zealand First party which has an all-important nine seats – 61 seats are needed for the majority. While a Labour victory might create political uncertainty and cause NZD exchange rate losses, a Kiwi rally is largely expected if current Prime Minister Bill English remains in power.

 

CAD – Canadian economy may improve in second half of year

The Canadian dollar had been in the depths of a five-week low versus the US dollar last week until Friday’s domestic data noted a pickup in wage growth and quelled concerns that the North American economy may experience a slowdown in the second half of 2017. Canada created another 10,000 jobs in September, slightly below the 14,500 forecast, but wage growth expanded at its fastest rate in over a year. Average hourly earnings ticked up by 2.2% in September on the year, suggesting a wage growth recovery may be on the way.

 

AUD – RBA could still cut rates

The Aussie dollar has started the week on the back foot after its largest trading partner, China, printed some uninspiring data. The Chinese services activity index dropped to a 21-month low at 50.6 in September, just hovering above the 50.0 threshold which separates expansion from contraction. August’s figure had resided at a healthier 52.7. Additionally, the Australian dollar experienced softness last week after the Reserve Bank of Australia (RBA) announced that it hadn’t ruled out further cuts to interest rates, should the household sector note additional weaknesses.

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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