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Weekly Currency Market Analysis

Europe’s economy grows but recovery remains delicate

GBP

Sterling took a beating last week as the Bank of England indicated rates would not rise until late in 2015 and warned that prices will struggle to climb as forecast. Inflation could fall below one per cent early next year, the bank warned, amid tumbling commodity prices that gave a strong deflationary note to global markets. Weak housing market data also weighed as sterling notched up its fourth straight weekly decline. The pound lost about three cents on the dollar as GBP/USD fell to its lowest in 14 months, while sterling lost ground to the euro, with EUR/GBP shedding more than one per cent to approach the 80 pence mark. GBP/AUD lost around four cents as the pound dropped to its lowest level against the Aussie since mid-September.

In the week ahead, Tuesday’s consumer price inflation data acts as a warm up for Wednesday’s release of minutes from the last Bank of England policy meeting. With the previous two meetings showing two of the bank’s nine-strong policy-setting committee voted for hiking rates, investors will be looking to see if any others have been swayed to tighten early.

 

USD

The dollar keeps on going and last week saw yet more gains for the Greenback. USD/JPY struck a fresh seven-year peak as the yen came under intense pressure on bets that Prime Minister Shinzo Abe will call a snap election in December. The dollar index was at its highest since June 2010 as US retail sales were better than expected. EUR/USD dropped back to a two-year low, while the Greenback inched up to its highest in more than year against the pound.

This week will see the release of minutes from the last Federal Reserve meeting, which should act as the usual grist to the market’s interest rate hike rumour mill. The Philly Fed Manufacturing Index and inflation figures will also be closely watched by investors.

 

EUR

It was a mixed bag for the euro as string of data painted a confused picture of Eurozone health. German inflation figures disappointed, but French prices rose more strongly than thought. Even if demand rises, falling oil prices are heaping pressure on the European Central Bank (ECB) to reach its two per cent target. GDP data on Friday showed Germany narrowly avoided a triple-dip recession but Italy’s economy contracted again. The euro was up against the pound but retreated to a two-year trough against the dollar as mounting bets the ECB will launch fresh easing measures continue to weigh on the single currency. The euro rose to a new six-year peak against the embattled yen.

Speeches by ECB president Mario Draghi bookend the week, with investors likely to pay close attention to any hints that the bank is about to start buying government bonds as it faces an increasingly worrying threat of deflation in the bloc. Meanwhile manufacturing data from France and Germany will again be in focus.

 

BRL
Brazil’s real slumped to a nine-year low, as falling oil prices continued to dent exporters. BRL/USD rose sharply as state-run oil producer Petrobras delayed its earnings report amid a police investigation of corruption.

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