The pound strengthened against the euro throughout the course of yesterday as the UK awaited news from Boris Johnson’s meeting with Jean-Claude Juncker in Luxembourg. GBP/EUR exchange rates hit the highest levels seen since the beginning of June, almost reaching 1.13 at the interbank level.
Boris Johnson released a statement after the meeting to confirm that talks between the UK and EU will now intensify, and he reiterated that the UK will not extend the Brexit deadline past 31st October. Johnson and Juncker both agreed that meetings would be required to take place every day in order to reach an agreement, including discussions between Michel Barnier and Brexit Secretary Stephen Barclay. Johnson must now present proposals for the Brexit Backstop which are compatible with the Withdrawal Agreement, however according to President Juncker, such proposals haven’t been presented so far.
UK data releases of note this week include August Consumer Price Index figures, a measure of inflation, released on Wednesday at 9.30am. This Year on Year figure is expected to fall from 2.1% to 1.9%. Other inflationary data sets include Retail Price Index and Producer Price Index which are also released at the same time and are all expected to fall compared to the previous readings.
On Thursday, the Bank of England will meet to announce its latest Interest Rate decision at 12pm, with minutes being released shortly afterwards. It is widely expected that the bank will choose to keep interest rates on hold at 0.75%, however any signals to future changes to monetary policy could result in volatility for sterling exchange rates.
The euro fell to its lowest level against the pound yesterday in over 3 months, prompted by further negative comments from ECB members following the European Central Bank’s announcement last week of cutting interest rates, and starting an open ended bond buying programme in order to stimulate the economy.
Pierre Wunsch, Governor of the National Bank of Belgium, in an interview yesterday suggested that there was a large consensus amongst his fellow policymakers not to raise rates again until inflation had picked up substantially, but that there were a few who were opposed to re-starting its bond buying programme again.
This morning at 10am, ZEW will release its Economic Sentiment survey for September. This figure is expected to improve from -43.6 to -32.2, which could cause the euro to strengthen against the pound.
The US dollar has strengthened following from an attack on Saudia Arabia’s oil reserves which wiped out 5% of global crude oil output overnight on Sunday. The attack, which has been pinpointed to Iran by the US and Donald Trump, caused the biggest surge in the price of oil since 1991, rising by 19%. It is now predicted that it could take months before Saudi oil production could return to normal, despite Donald Trump’s announcement that he would release emergency US supplies.
However, until the impact on global supply is shown to be minimal, it is expected that the price of oil will remain high. This also allowed the Canadian dollar to strengthen over the course of yesterday by over a cent against the pound at the interbank level, as oil is Canada’s largest export.
In times of global uncertainty, safe haven currencies such as the US dollar and the Swiss franc tend to be the main benefactors, therefore we could see further strength for the US dollar until oil supply is restored.
The Federal Reserve will release its latest Interest Rate decision on Wednesday evening at 7pm, followed by the Fed’s Monetary Policy Statement. It is widely expected that the FED will cut rates by 25 basis points to 2%, however some economists have suggested a 50 basis point cut could be possible, which would bring the rate to 1.75%.
The Reserve Bank of Australia (RBA) released minutes overnight last night from its latest Interest Rate decision meeting, where it was announced that the bank would cut rates for the second time in a row, bringing the Interest Rate to an all time low of 1%. The Central bank suggested that it would consider further tightening of monetary policy if needed in order to boost growth, and that it is reasonable to expect a period of low interest rates to help improve unemployment levels. The Australian dollar has weakened further against its major currency counterparts overnight following this release.
There has been much speculation that the RBA will need to cut rates further, potentially down to 0.25%, according to recent negative forecasts from ANZ and National Australia Bank (NAB). Both banks have also predicted that Interest Rates will be cut to 0.75% by November, which could even happen by October according to NAB Chief Economist, Alan Oster.
In the early hours of Thursday morning, Australia’s Unemployment Rate and Employment Change figures will be released. The Unemployment Rate is expected to rise from 5.2% to 5.3%, and Employment Change is predicted to fall from 41.1k to just 10k. A lower reading can have negative implications on consumer spending, and therefore the economy, and could cause the Australian Dollar to weaken further if this is the case.
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