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Currency Market Analysis

Sep 09, 2019 | Currency Market Analysis

Global Themes

UK politics, ECB rate decision and US inflation; the week ahead
- Dovish ECB priced in or will Euro fall lower?
- Political uncertainty could limit sterling’s recovery
- Busy week of UK data
- US Dollar sellers exhausted?

EUR

Dovish ECB priced in or will Euro fall lower?
One of the main risk events this week is the European Central Bank’s (ECB) monetary policy meeting on Thursday. A 10-basis point cut in the bank’s deposit rate is expected, though ECB President Mario Draghi may also signal more quantitative easing on the horizon, which could weaken the common currency.

In one of his final acts as ECB President, Mr Draghi is expected to announce more stimulus to buttress the weakening Eurozone economy, but seeing as rate cuts and more stimulus is forecast, there is a chance, the Euro could strengthen if Mr Draghi isn’t as dovish as anticipated. Money markets are already pricing in multiple rate cuts before the end of the year and we’ve witnessed the Euro significantly weaken amidst this pricing and persistent poor economic data from the bloc. EUR/USD sagged towards $1.09 last week, its lowest level since May 2017, and could extend its recent recovery if the ECB meeting this week fails to meet investors’ demands.

Aside from the ECB meeting and Mr Draghi’s press conference afterwards, Eurozone industrial production data will be released on Thursday morning and Brexit headlines will continue to dominate both sterling and Euro trading sentiment.

GBP

Political uncertainty could limit sterling’s recovery
Today, UK lawmakers return to parliament and are expected to block Prime Minister Boris Johnson's second bid to call a mid-October general election. This could help the British Pound scale higher as it reduces the chances of Mr Johnson forcing a no-deal Brexit if he were to win or even delay the general election until after October 31.

The PM looks to be boxed in, unable to get a general election and seemingly unable to force through Brexit on October 31, with or without a deal. The tumultuous week of politics last week saw MPs push through a bill in both houses of Parliament that forces Mr Johnson to request a delay to Brexit until January 2020 if a new withdrawal agreement isn’t reached and approved before the Halloween deadline. However, avoiding a no deal is still not a guarantee as the PM could simply refuse to request the extension or the EU could refuse to grant it. Furthermore, speculation is growing that Mr Johnson may advise the Queen to refuse royal assent, which is required for the bill to become law, and thereby keeping no deal on the table.

In addition to the Brexit uncertainty, there may be ways around the PM achieving his general election too, with a suggestion that he could call a vote of no confidence in his own government. What remains certain is prolonged uncertainty, and this will be ramped up in a general election. Sterling has retraced from last week’s highs, with GBP/USD headed towards $1.22 this morning.

ECB

Busy week of UK data
UK GDP data for July drops in at 9:30am today, with the rolling 3-month forecast up until July expected at -0.1%. The annualised figure is forecast at 0.8% from 1.0% a year ago whilst at 0.1% increase is forecast in July from 0.0% in June m/m. Industrial and manufacturing output will also be released at 9:30am, both expected to print negative numbers once again.

The UK economy is slumping amidst ongoing Brexit and political uncertainty tainting business investment and consumer confidence. PMIs last week revealed UK sectors are shrinking, bar the pivotal services sector that teeters on the edge of contraction. Today’s growth and output results will be heavily scrutinised by investors and could add to the pound’s recent woes. In addition, Tuesday morning brings unemployment and wage growth figures and Bank of England Governor Mark Carney hits the wires in the afternoon.

The main driver of sterling’s trading direction will likely be Brexit though and GBP/USD has already slipped over a cent from last week’s high as PM Johnson vows to fight the Brexit extension. GBP/EUR has extended its fall from 1-month highs last week and has already tested the €1.11 handle this morning.

USD

US Dollar sellers exhausted?
The US Dollar pulled back from over 2-year highs last week as risk sentiment improved amidst easing trade tensions between the US and China. However, the USD selling bias that picked up last week quickly ran out of steam and the US currency could be on for a further rebound higher this week. US inflation and retail sales drop in on Thursday and Friday respectively this week.

After a rollercoaster week for the dollar last week, rising to over 2-year highs and dragging EUR/USD towards $1.09, the currency pair then rallied around 1.5% in three days to test the $1.11 mark. The weaker US Dollar then fought back, buoyed by hawkish comments from Federal Reserve (Fed) policymakers suggesting multiple US rate cuts weren’t a guarantee for the rest of the year. There is a risk that investors have been overpricing Fed dovishness and if the central bank doesn’t deliver on multiple rate cuts before year-end, then we could witness further demand for the dollar.

Already there is some evidence that traders are adjusting their positions. Last week, speculators' net long USD bets increased for the first time in five weeks, according to data from Commodity Futures Trading Commission data released on Friday. This suggests investors are banking on the dollar appreciating in the future.


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