Currency Market Analysis

Jan 18, 2016 | Currency Market Analysis

Global Themes

Iran’s new ability to flood the market with more oil has forced oil prices below the key $30 threshold, meaning deteriorating sentiment about the health of the global economy is still negatively impacting currency markets.  The Pound’s 2.2 percent fall against the Euro on Friday, moving the GBP/EUR rate below the €1.30 level for the first time in a year, is just one example of the exchange rate volatility which has taken international businesses by surprise.  China’s GDP data tonight could help calm bearish market sentiment before CPI Tuesday in the UK and Thursday’s important ECB policy decision.


One opinion poll released this weekend surprisingly put a greater chance on a UK exit from the EU, but BREXIT fears are not holding back a sharp Sterling rebound this morning. The GBP/EUR rate has jumped 0.7 percent this morning. This rate fell 2.2 percent on Friday, sealing the Pound’s worst run of weekly losses since the Euro was introduced in 1999. With GBP/EUR trading near €1.30 again, BOE Governor Mark Carney speaks just after CPI Tuesday before Wednesday’s important UK wage growth data.


As oil prices continue to fall, creating more concerns about inflation prospects in Europe, Thursday’s ECB press conference will be a critical trading point for the Euro.  The Euro could be eyeing a surprise rally towards $1.10-$1.11 versus the US dollar unless President Mario Draghi says more monetary stimulus is very likely in Q1.  Since the ECB’s last policy announcement on December 03 missed dovish expectations, the EUR/USD rate has risen by 3 percent.


Friday’s weak US retail sales and industrial output reports negatively impacted market sentiment, ensuring the US dollar retained support from a safe haven perspective.  Financial markets data show traders now see almost no chance of a second US rate hike on January 27 – a decision which could cause a more marked shift in the US dollar.  Several Fed members spoke last week and highlighted the risks to the US economy from uncertainty in Emerging Markets.


The Bank of Canada could deliver a surprise interest rate cut on Wednesday - a move which could send the Canadian dollar to its weakest levels since 2007 versus Sterling.  The central bank cut interest rates twice in 2016 as Canada’s economy was hit by falling oil prices. With oil falling another 20 percent this year, there is a risk of the BOC pointing to more stimulus.  GBP/CAD trading in the 2.06-2.08 range, up by over 2.5 percent this month.

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