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North Korea Tensions Pressure Currencies Lower, Central Bank Decisions Ahead

04 September 2017 by FC Exchange

North Korea tensions are likely to influence the currency market this week, while economic data and central bank comments could also impact exchange rates, say forex specialists FC Exchange.

GBP – Brexit negotiations make little progress

Last week

August didn’t just see the pound to euro (GBP/EUR) exchange rate register its fourth consecutive month of declines; it also marked sterling’s worst performance in 10 months. Furthermore, last week saw the pound hit its lowest level against the single currency since October’s flash crash; these lows haven’t been seen since the Global Financial Crisis (GFC).

The pound’s come under pressure from increasingly sluggish Brexit negotiations and less-than-inspiring economic data, and economists have suggested sterling could continue its decline in coming months, perhaps even to parity. However, last week saw the UK’s consumer confidence creep a little higher in August, after July’s one-year low, but the report still showed attitudes towards economic progress in the next year to be sombre at best. In positive news, the UK’s manufacturing sector bypassed expectations and hit a surprising four-month high in August. Markit’s manufacturing purchasing managers’ index (PMI) came in at -56.9, a jump up from the previous 55.3.

Director at IHS Markit Rob Dobson commented: ‘The UK manufacturing sector continued to show signs of solid progress during the third quarter, with rates of expansion in new output, new orders, and employment all gathering pace in August. The key question is whether this positive start to the second half of the year can be sustained.’

Week ahead

This week Markit will release construction and service sector data which may have a moderate influence over the pound, but Friday will perhaps be the main day for sterling in terms of economic releases. The UK’s trade balance number will be printed, as well as the third quarter growth estimate and consumer inflation expectations. Markets will also be looking towards any comments made my politicians or policymakers at the Bank of England, and towards the next round of Brexit talks that begin on 18th September in Brussels.

 

EUR – German figures bode well for Merkel

Last week

Last week German consumer confidence edged higher in August, hitting a 16-year high. Sentiment in the Eurozone’s biggest economy is forecast to improve further in September which could create a new high for the economic indicator. GfK who undertake the survey suggested that the improved mood was attributed to a strong labour market. The figure bodes well for Angela Merkel as she attempts to secure her fourth term as Chancellor of Germany. Last week also showed the German inflation rate had risen from 1.7% to 1.8% in August and the nation’s unemployment rate remained stable at 5.7%.

Eurozone business confidence also climbed higher in August, and the Eurozone’s unemployment number also held steady at 9.1%.

Week ahead

Markets will be closely watching European Central Bank (ECB) President Mario Draghi this week. Economists are expecting the central banker to address the strengthening euro following his avoidance of the topic at the recent Jackson Hole summit. As the central banker prepares the land for an adjustment to the Eurozone’s stimulus measures, it’s a key time for Draghi to address the strength of the euro. The common currency has climbed by 13% versus the US dollar in 2017 so far and sharp currency appreciation could hinder some of the weaker euro area nations in their recovery going forwards. The ECB Governing Council is scheduled to meet in Frankfurt on September 6th and 7th, and therefore dramatic euro movement towards the end of the week could be a possibility after the decision and while Draghi’s press conference takes place.

One of the other big events this week is likely to be the third estimate for the Q2 Eurozone gross domestic product (GDP) growth rate. Eurozone growth has been powering ahead, and current forecasts suggest that the reading could climb from 1.9% to 2.2% on the year, a move that would likely be euro positive.

 

USD – North Korea tensions weigh on US dollar

Last week

Last week US GDP hit President Donald Trump’s 3.0% target in Q2, rather than residing at the 2.7% forecast. The US Bureau of Economic Analysis commented: ‘The acceleration in real GDP in the second quarter primarily reflected upturns in private inventory investment and federal government spending and an acceleration in PCE [personal consumption expenditure] that were partly offset by downturns in residential fixed investment and state and local government spending and a deceleration in exports.’

This data translated into positive US dollar movement, until the President took to Twitter to increase geopolitical tensions between the US and North Korea. The situation in North Korea has seen investors head for safe-haven assets in recent weeks as the possibility of conflict escalates.

Additionally, one of the most disappointing events for the US currency last week was the release of weaker-than-forecast US non-farm payrolls figures. The August reading came in at 156K, rather than the 190K forecast, while the US unemployment rate increased from 4.3% to 4.4%. The dollar index dropped by 0.5% as the greenback fell following signs the US labour market is cooling, while sterling was able to gain around 0.4% in the aftermath of the result. However, the dollar recovered some of its losses against other majors as the session went on.

Week ahead

Markets will be eyeing tensions in North Korea very carefully this week as reports flood in that the nation is preparing another ballistic missile. Monday morning began with the greenback softening against the safe-haven Japanese yen and Swiss franc as markets shied away from the political uncertainty.

Meanwhile, the rest of the week will see a few influential data releases such as the US balance of trade and ISM non-manufacturing PMI. Economic data is being closely watched at present as investors attempt to price-in the possibility of another interest rate increase this year. Other releases this week will include the Federal Reserve’s Beige Book on Wednesday which will detail the health of the US economy, a raft of manufacturing data, and weekly employment figures.

 

AUD – RBA interest rate decision ahead

It looks set to be an interesting week for the Australian dollar with the Reserve Bank of Australia (RBA) due to make its next interest rate decision on Tuesday, ahead of GDP growth figures scheduled for Wednesday. Thursday will also see the latest Australian trade balance number for July released. Unfortunately for the Aussie, North Korean tensions are likely to pressure the commodity currency if risk aversion kicks in.

CHF – Markets await Swiss economic data

Switzerland will also print its Q2 growth rate numbers this week which are expected to attain 0.6% quarter-on-quarter. Additionally, Switzerland will release its unemployment rate on Friday. The franc may experience an increase in demand should the situation with North Korea worsen.

CAD – BOC forecast to keep rates on hold

The Canadian dollar has the potential to experience some data-led movement this week; Canada’s balance of trade will be out on Wednesday, followed by the Bank of Canada’s (BOC) interest rate decision. Investors are expecting the central bank to keep rates on hold following July’s increase, which was the first in seven years. Friday will see the nation’s unemployment rate and employment change figures reach markets.

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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