Sterling halts losses, market awaits Fed and ECB releases
05/Apr/2016 • Currency Updates•
Yesterday, Sterling plunged to a two-year low in trade-weighted terms in the early morning before recovering over the rest of the day. The Pound has suffered recently due to ongoing concerns regarding the EU referendum in June and its effect on Bank of England interest rates and the UK’s already sizable current account deficit.
Better-than-expected construction data in the UK on Monday bodes well for the latest services PMI this morning. Sterling traders will look to next week’s Bank of England meeting as the next major event in the UK.
The US Dollar was little changed yesterday, bringing some respite following its recent run of declines. Delayed expectations for an interest rate hike by the Federal Reserve have sent the US Dollar to around its lowest level in five-and-a-half months against its major peers.
Many businesses are using this temporary weakness in Sterling and the US Dollar to implement risk management strategies before long-term trends reassert themselves. This is particularly noticeable amongst businesses that sell into the EU or import from China as covering their exposure now could offer significant protection for their margins in the future.
This week the currency markets are focused on the Federal Reserve, which releases the minutes from its March monetary policy meeting on Wednesday evening. Fed policymakers have surprised many economists in the past few weeks by signalling interest rates will likely increase more gradually than originally anticipated. This Wednesday’s minutes should provide more detail.
The European Central Bank’s meeting minutes on Thursday could also cause moderate volatility this week, with any commentary on the Euro’s recent rally likely to be significant. Speeches from ECB President Mario Draghi and Vitor Constancio will also be in focus later in the week.
Major currencies in detail:
Sterling ended 0.5% higher against the US Dollar yesterday, despite a lack of major releases in the UK economy. However, the currency remains significantly lower for the year following concerns over a potential EU exit in June.
Growth in the UK construction industry beat expectations yesterday, although remained at its lowest level in ten months in March. The monthly index from Markit remained unchanged at 54.2 last month, with construction of new homes in Britain falling to its lowest level in three years.
While the report didn’t mention the effect of the EU referendum, Markit suggested that heightened uncertainty regarding the business outlook had weighed on demand so far in 2016.
This morning’s services PMI will be the only major economic announcement in the UK today. The index is expected to increase from its three year low of 52.7 registered in February.
The Euro remained around its strongest position against the US Dollar since October as markets opened on Monday, with the single currency ending the session 0.15% higher.
This small Euro rally came despite further signs of a lack of inflationary pressure in the Eurozone. The producer price index plunged even further in February, falling by 4.2% on a year previous, its largest annualised drop in over six years. This larger-than-expected fall could ramp up pressure on the European Central Bank to further increase its monetary stimulus measures in the coming months.
In other announcements, unemployment in the Eurozone inched downwards to a four-and-a-half year low of 10.3%. Investor confidence, as measured by Sentix, ticked upwards to 5.7 from 5.5, although remained around its weakest level since the beginning of 2015.
Attention this week will be on a speech from Draghi in Portugal on Thursday. In the meantime, the latest services PMI and retail sales this morning could cause moderate volatility in the Euro.
The US Dollar received some respite from its recent poor performance, although remained around a five-and-a-half year low on Monday. The US Dollar index fell by 0.1% despite commodity-related currencies weakening on falling oil prices.
There were limited major economic releases in the US yesterday, hence the subdued reaction in the USD. Factory orders fell more than expected in February, declining by 1.7% last month following January’s modest increase. Elsewhere, the Fed’s labour market conditions index increased, although remained in negative territory at -2.1.
Volatility in the US Dollar should pick up in the next couple of days ahead of the Fed minutes.
There will be a number of second-tier announcements in the US today. The latest JOLTS job openings and ISM non-manufacturing PMI at 15:00 UK time will be the highlight.
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