Welcome to the Weekly Market Analysis - our digestible currency market update which gives you an expert insight into key movements, and what to expect in the coming week.
Sterling was on the back foot last week amid general market turmoil that saw a broad sell-off in equities and riskier assets. Friday’s relief rally failed to bolster the pound though as a senior Bank of England official warned that interest rates could stay at record lows for a lot longer. Andrew Haldane said he was “gloomier” about the outlook for the UK despite another fall in unemployment. The pound lost ground to the dollar even as the Greenback came under selling pressure itself, with UK inflation slipping to a multi-year low. Sterling shed roughly one pence on the euro. GBP/AUD was down more than a cent from its early week highs.
This week, Sterling’s direction will be based on Wednesday’s Bank of England meeting, though after Mr Haldane’s comments, it’s unlikely that we will see any change in interest rates. Friday’s preliminary GDP figures will also be closely watched for signs of UK economic health.
It was a volatile week for the currency markets and the dollar was at the centre of things. As bond markets were in rollercoaster mode and stocks were dumped, there was a broad sell-off in the dollar. But as things calmed down later on in the week the Greenback clawed back some losses. EUR/USD advanced to a three-week high, while USD/JPY and USD/CHF both lost around one per cent as the safe haven yen and Swissie were favoured by spooked investors. The dollar had been rising steadily on expectations the Fed is about to end its QE programme and is ready to hike interest rates early next year. But concerns about global growth and some lacklustre US data has seen this confidence fade.
Markets will continue to digest comments from two senior Federal Reserve officials, who said the bank could prolong its bond-buying programme if inflation expectations remain too weak. With Wednesday’s CPI data, the remarks by James Bullard and John Williams could be especially important for the dollar.
In spite of all the fears about the Eurozone and a surge in Greek bond yields, the euro advanced last week as investors sought shelter in German bonds. The single currency hit a three-week peak against the dollar and rose to its highest level in over a month against the pound before paring gains.
This week, investors will be searching for any more signs that the ECB may seek to expand its asset purchases beyond the buying of private debt through ABS. So far Mario Draghi has refused to blink but if more pressure is exerted on peripheral nations via the bond market his hand could be forced. Manufacturing data later in the week will be closely watched.
South Korea’s won led Asian currencies’ gains last week as investors pushed back bets that the Fed is ready to hike rates. KRW advanced 0.4 per cent against the Greenback, while Indonesia’s rupiah also gained strongly.