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Pound Retains Gains, Aussie Reaches Two-Year High Versus US Dollar

11 September 2017 by FC Exchange

A lot happened in the currency market last week and more movement is forecast this week on account of geopolitical developments, economic data, and central bank announcements, say foreign exchange specialists FC Exchange.

GBP – Pound retains gains against EUR and USD

Last week

Last week was rather positive for the pound as it rallied against currencies like the euro (GBP/EUR) and US dollar (GBP/USD) and maintained its gains. There were a few developments throughout the week which supported sterling, such as the UK manufacturing sector reporting its first month of significant growth in 2017, boosted by car production. On the month, the manufacturing sector registered 0.5% growth in July, pushing the annual figure up to 1.9% from 0.6%.

Meanwhile, the UK’s reliance on European trade was highlighted when the Office for National Statistics (ONS) revealed that British exports to the EU rose by £1.8 billion, equating to 4.4%, in the three months to July in comparison to the previous three months. However, disappointingly exports destined for the rest of the world noted a 3.9% fall, which equated to £1.7 billion. The UK’s trade deficit grew by £400 million in the three months through July, bringing the total to -£8.6 billion. It was hoped that the pound’s dramatic decline post-EU referendum would boost British exports, but this hasn’t materialised and some have suggested that the pound would need to soften further to balance the deficit.

Week ahead

The pound starts the week in the interbank region of 1.3192 versus the US dollar, and 1.0981 against the euro ahead of some significant data releases. Tuesday will be a big day for sterling with the UK inflation figure due to make its way onto the scene. If inflation manages to rise as forecast from 2.6% to 2.8%, the pound could be offered a further boost, whereas a less optimistic inflation figure could further dash hopes of a Bank of England (BoE) interest rate increase and see the British currency weaken. Wednesday will continue the stream of influential figures when UK labour market data is published. The unemployment rate is expected to hold steady at 4.4% and wage growth is expected to climb slightly higher. A larger-than-forecast boost in wage growth could be extremely pound positive as weekly earnings have been lethargic since the Global Financial Crisis.

However, one of the main events for sterling this week will be the Bank of England interest rate decision. Markets will be watching closely to see how many policymakers vote in favour of a rate increase and speculation for the timescales of rate hikes is likely to heat up. Any Brexit developments could also create significant GBP movement this week.

 

EUR – Single currency jumps versus US dollar

Last week

Last week the euro was trading near a 33-month high versus the US dollar (EUR/USD) following the European Central Bank’s (ECB’s) meeting. The central bank announced that it had undertaken ‘very preliminary’ talks on how to begin tapering its massive bond-buying programme, but that the main discussion would be held in October. As a result, the euro jumped above $1.20. Some economists had voiced concern that the rising euro could put a kink in the ECB’s plans to taper its €60 billion-a-month bond buying scheme, as it makes exports—something the Eurozone is heavily reliant on—more expensive.

Last week also showed that the strengthening euro had weakened German exports as Germany’s trade surplus shrunk more than forecasts had anticipated in July. Germany’s surplus fell from €21.9 billion in June, to €19.5 billion in July. Meanwhile, the ECB forecast the Eurozone will grow at its fastest pace in 10 years in 2017, at 2.2%. Last week Eurozone growth came in at 2.3% on the year in Q2, in the third estimate.

Week ahead

Several European Central Bank representatives are expected to speak this week which could encourage some EUR exchange rate movement. However, in terms of economic data, it’s a rather quiet week for the euro area. The final German inflation number will be out on Wednesday along with the Eurozone industrial production, and Eurozone employment figure stat which could create some moderate common currency movement. Friday will finish up the week with the Eurozone trade balance number which is a low-tier piece of data. This week it’s likely developments elsewhere will dictate a lot of the euro’s movement.

 

USD – Advance retail sales ahead

Last week

The US dollar had its worst week in two months last week as North Korean tensions rose and the US braced itself for Hurricane Harvey and Hurricane Irma. It’s thought that the hurricanes could impact US economic growth after areas such as Florida were left ravaged. President Donald Trump announced last week that he would be attempting to speed up a tax code overhaul as a result. These economic disruptions could see the Federal Reserve keep interest rates on hold for longer too, rather than hiking as forecast by the end of the year. However, New York Federal Reserve President William Dudley suggested that the rebuilding efforts could increase economic activity.

Week ahead

While eyes will remain focused on North Korea and Hurricane Irma, there are several influential ecostats due out this week which could create US dollar movement. On Monday the New York Fed survey of consumer expectations will be out, followed by mortgage applications data on Wednesday. However, Thursday will likely be the big mover in terms of ecostats with the release of the US consumer price index (CPI). Inflation is expected to rise from 1.7% to 1.8% on the year in August, which could offer the greenback some opportunity to rise. Friday will close the week with advance retail sales and University of Michigan confidence data.

 

AUD – Aussie reaches two-year high versus US dollar

Last week the Australian dollar managed to rocket to a two-year high versus the US dollar (AUD/USD) which raised speculation that the Reserve Bank of Australia (RBA) may find it difficult to begin hiking rates from its current record lows. RBA Governor Philip Lowe commented: ‘An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.’ The Aussie was able to register gains against the greenback as investors downgraded expectations for US President Trump’s economic reforms which would have bolstered growth.

Last week ecostats revealed Australia’s economic growth came in at 1.8% on the year in Q2, and on a quarter-on-quarter basis expansion fell slightly short of the 0.9% expectation, at 0.8%. This still showed a significant improvement on the previous 0.3% reading. Last week the RBA kept rates on hold at 1.50%.

 

CHF – Investors leave safe-haven assets as North Korea fears ease

Safe-haven assets lost some of their appeal as fears over North Korea and its missile tests eased. Markets had been watching to see if North Korea would test a missile on the 69th anniversary of the country’s founding day, but instead Pyongyang enjoyed a celebration. If Kim Jong Un stays out of the spotlight this week investors will likely focus on the fallout of Hurricane Irma, and the Franc could fall as geopolitical tensions subside.

 

CAD – Bank of Canada hikes interest rates again

Investors were taken by surprise last week as the Bank of Canada (BOC) hiked interest rates again in its second consecutive move higher. The bank rate now resides at 1.0% after a 25-basis point increase on Wednesday following stronger-than-forecast economic data. The Bank of Canada stated: ‘Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broad-based and self-sustaining.’ Investors are still debating the possibility of another rate increase by the end of the year.

 

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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