Global Themes

Investors are seeking some pretty major headlines in the week ahead to inject fresh impetus into currency markets, with both the British pound and US dollar potentially on collision course. Both the UK and US will publish fresh GDP reports while the Federal Reserve will make a rate announcement on Wednesday night. Hawkish future rate hike signals from either market could have a larger-than-expected positive impact on respective currencies given that countries such as China under opposite pressure to slash interest rates further. Overnight China’s stock market suffered another major sell-off.

USD

The US dollar has run over a number of currencies from the commodity and emerging world in recent days as worrying Chinese headlines hit those currencies. However, the dollar’s appreciation against the Euro and Sterling has been a little more muted amid uncertainty before this week’s high-profile US announcements. On Wednesday night at 19:00 the Fed will make its latest decision on interest rates and release a policy statement. Markets data suggests a dovish Fed will not raise rates in September this year, while the majority of economists believe September 17 will be the most likely date for raising rates.

The answer to this disconnect may come in the Fed’s policy statement on Wednesday night. If the Fed believes the US economy is solid enough to hike rates on September 17, analysts say this week’s statement ‘should’ contain a clear hiking reference to prepare markets. But if the Fed continues to push investors to look towards economic data for rate clues, the data will come on Thursday at 13:30 in the form of US Q2 GDP estimates. The US economy is expected to grow by 2.6 percent (y/y) in Q2, while the -0.2 percent contraction in Q1 is expected to be revised up to a positive number.

Wednesday and Thursday’s US announcements together are expected to be a major trading point for both the US dollar and global currency markets.

GBP

On Tuesday at 09:30 Britain will release Q2 GDP estimates, with Sterling likely to rally against the Euro if a strong report supports BOE Governor Mark Carney’s recent hawkish comments about future rate hikes. Analysts expect growth of 0.7 percent (q/q) between April and June, almost twice the 0.4 percent expansion in Q1. However, a weaker number in the context of slowing global growth led by China, may not bode well for Sterling ahead of the BOE’s critical Quarterly Inflation Report and interest rate guidance on August 06. GBP/EUR is down more than 2 percent over the past week.