Currency Market Analysis

Dec 07, 2015 | Currency Market Analysis

Global Themes

The Bank of England and Swiss National Bank will make important interest rate decisions on Thursday this week. The risk of big dovish surprise from Switzerland has fallen after last week’s surge in the Euro but pressure on the Swiss to intervene in currency markets to weaken the Swiss franc further remains high. The Bank of England's (BOE’s) interest rate decision will be an important trading point for Sterling after the UK currency lost more than 3 percent against the Euro last week. Uncertainty about the pound’s outlook against the US dollar still remains a big concern for British importers before the all-important US rate decision on December 16; GBP/USD market predictions for February next year range by 12.7 percent, from a high of $1.5900 to lows of $1.4100.


China’s central bank has taken new action to weaken its currency over the weekend, pushing the Renminbi to its weakest levels in three months against the US dollar. The move comes before data this week that is expected to show a further deterioration in Chinese exports and inflation. With oil prices still under pressure to go even lower, China’s producer prices are expected to drop by -5.9 percent y/y in November which underlines the pressure on Beijing to launch more monetary stimulus. The GBP/CNH rate is near a two-week high.


The Bank of England’s interest rate decision this Thursday will be an important trading point for Sterling after the UK currency lost more than 3 percent against the Euro last week. Given worries about too low inflation and the Pound’s rise to multi-year highs against the Euro, the BOE could continue to delay raising interest rates with investors currently predicting no rate rise until late-2016. A dovish BOE announcement this week could leave the Pound vulnerable to a further decline against the Euro. The GBP/USD rate is trading 1.5 percent above a seven-month low around the $1.48-1.50 price range.


The risk of the Swiss National Bank (SNB) shaking currency markets with an interest rate cut or more FX intervention this Thursday has fallen. Last week the European Central Bank’s stimulus injection disappointed markets, and this has eased pressure on the Swiss to act with the Euro gaining sharply on December 03 and the Swiss franc weakening. However, the SNB is still under pressure to weaken the franc further against the Euro to help reverse Switzerland’s negative inflation rate and boost exports. A fresh move by the SNB to intervene either verbally or directly in currency markets cannot be ruled out on December 10. Last week the franc appreciated by 4 percent against the US dollar.


Late on Friday European Central Bank President Mario Draghi spoke in New York but his attempts to fix a surge in the Euro with new dovish comments had little impact. A day earlier the Euro set its biggest one-day gain in six years, appreciating by some 4 percent against the US dollar after the ECB’s stimulus injection disappointed currency markets. In the weeks leading up to the ECB’s event risk on December 03 Draghi had primed markets for a much more aggressive package of interest rate cuts and QE. The Euro gained by 3 percent against Sterling last week.


Friday’s US non-farm payrolls report impacted US equity markets but did little to move the US dollar as investors hold in anticipation of the Federal Reserve’s all-important interest rate decision on December 16. The solid US jobs and unemployment report did however keep intact consensus expectations of the Fed raising rates this month for the first time in 10 years. US retail sales data on December 11 will be another important economic report before the big announcement with currency traders highly divided on how the Fed’s decision will affect exchange rates. GBP/USD forecasts for the next three months range by 12.7 percent, from a high of $1.5900 to lows of $1.4100. 

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