Despite inflation figures for Europe being on the lower side of expectations recently, the Euro clawed back some ground against the pound after PMI data in Europe showed an improvement, and the overall EU unemployment rate came down. In contrast UK Manufacturing PMI came out lower than forecast, and as a result sterling Euro exchange rates dipped yesterday.
However today we see the release of UK Construction PMI, backed up tomorrow by Services PMI, both of which form a much larger proportion of the UK economy. If these figures are positive we could see sterling rally back against the single currency, particularly if the ECB meeting on Thursday raises any concerns. Inflation in Europe has once again proved disappointing and must surely be a concern for Mario Draghi and company.
Also if you look at the EU unemployment figures in more detail, you actually saw an increase in the unemployment rate Italy which was offset by a decrease in Germany. To this end I think it is only a matter of time before the ECB’s once size fits all policy comes under pressure again, and the likely solutions in my mind all lead to Euro weakness (bond buying, interest rate cuts etc). Therefore if you are looking to sell Euro then I would be inclined to do so quickly, whereas Euro buyers may want to see if the pound can gain in value.
As mentioned I think the PMI data is very important, particularly the Services news on Thursday. The heavy flooding doesn’t appear to have damaged the UK economy as much as some economists had expected, and the resulting clearance may have actually boosted the construction industry. A strong showing in the Service sector (this is the part of the economy that covers the high street and financial services) will likely mean a strong showing for the pound in an otherwise quiet week.
This was a question a client asked recently and my answer was no. Whilst I do think sterling is faring a little better of late and may not fall back below 1.60 imminently, I think the current Cable exchange rates are more based on USD weakness than anything else. The Fed has been particularly cautious about the pace of recovery in the US, but I still think the signs are there. Non-farm payroll data is likely to be the big news at the end of the week. At some point I think the US recovery will gain traction, and when it does markets will start pricing in interest rate rises. Given how Mark Carney at the Bank of England seems to be finding reasons to push back UK rate hikes, the Fed may not be too far behind. If this is the case the Dollar will improve in value. If you would like to see how quickly live interbank exchange rates of can move then click here and you may want to call your broker quickly afterwards.
The Aussie Dollar has dipped slightly against sterling in the last 24 hours and some have suggested that the AUD has overshot and will now retrace its gains which could see some better buying levels for GBP AUD transfers. As mentioned in my last report (click here to read it) the RBA have been very consistent in their message that there is presently no need for any more interest rate cuts which had been one of the main factors weakening the Aussie. I expect the rate to stay range-bound in the early 1.80’s based on reasonable UK news, but I can’t see the Bank of England bringing forward any rate hike as a result. Given the two central banks may not change policy, I think the currency pair will stabilise for now. Keep a close eye on Glenn Stevens speech in the early hours of Thursday morning just in case though- or better still just place a stop loss or limit order and have your trade executed when you are still fast asleep!
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