US showing signs of contraction
The US this afternoon released contracting data that was expected to show a small decrease in activity; however the expected figures and what was released are significantly different. Furthermore the Producer Price Index which indicates the change in the costs faced by producers was also down.
These statistics indicate the movements for the inflation levels and contractions suggest that the country is not moving forwards.
Strong job data may be short lived
The US has released positive jobs data this week which and the momentum created from that data may have been short lived. The US Federal Reserve is currently sat on the fence with regards to increasing interest rates in the US. There has previously been talk of 4 interest rate hikes since the end of 2015 and so far we have seen 1.
Janet Yellen who is the Chairlady for the Fed has been keen to see unemployment decrease before considering further movements.
The recent positive job reports would have certainly got investors excited knowing Yellen is focusing on the employment level. However Yellen has always been one to stutter on a decision if all the factors are not perfect and poor Retails Sales will certainly be in her mind.
The US election is only just around the corner and it’s rare that a central bank will act before there is market changing factors to consider. Especially as Trump and Clinton have both revealed very different economic policies.
In my opinion in the next few months I believe the GBP/USD rate could move back into the mid 1.30’s. If it looks plausible for a Trump victory and he is in the running at the final decision then I have no doubt of major volatility that could work against the US Dollar. However in the short term rates will likely remain 1.30 bound with more concerns over the UK’s housing prices.
A month on from the UK’s historic vote to leave the EU, the markets have been waiting with anticipation for the first set of economic releases. From what little we’ve learnt about how the markets are reacting to releases, positive data has done very little to help Sterling whilst data supporting a negative trend panics the markets.
Global economic uncertainty is the main driving force behind the Fed’s decision to not introduce a hike as of yet, and as we wait for signs of US economic growth coupled with stability within the Global market, the Fed remain cautious over introducing a premature hike.
Yesterday we saw the Euro close at its highest level versus the Pound in 13 months whilst also setting a new 2016 high of 0.7787. The Euro has traditionally been preferred in times of financial uncertainly and current signs suggest no change to this pattern with the Euro gaining more than 5 percent verses the Pound this year alone. Euro bulls will also have been buoyed by ECB executive board member Benoit Coeure stating on Monday that “The Eurozone is not part of the problem,” when referring to current weakness and uncertainty in global markets, and that there are no bubbles within the Eurozone economy with emerging markets, China and the US economies creating anxiety within global markets.
In the short term I believe that the Euro will continue its bullish run versus the Pound predominantly due to the uncertainty surrounding the UK’s continued membership within the EU, also any signs of weakness in the UK’s banking and financial sector will heighten Sterling’s weakness due to the UK’s reliance on financial services to boost its economy. From a longer term perspective I believe we could see return to the long term upward trend in Sterling’s value versus the Euro due to reduced political uncertainty surrounding the UK once we know the outcome of the referendum, although should the UK opt for a ‘Brexit’ I expect further falls in Sterling medium term assisted by Bank Of England intervention in order to increase exports by making the Pound more attractive to overseas buyers.
Many analysts had questioned, once the FED had raised interest rates once, how soon the next rate rise would be and how much the Central Bank would hike interest rates by with some suggesting it could be as much as 3 interest rate hikes ending with interest rates up at or over 1% by the end of the year. However, with the recent downturn in the global economy the chances of further rate hikes seem to have been put back and in fact there is now the question of whether the FED will raise rates at all this year. As a result, the US Dollar (USD), has slowed its recent strength against most the major currencies although it is still very strong against both the Euro (EUR) and the Pound (GBP).
Inflation remains a key focus for the European Central Bank as it did for most of 2015 and with rapidly falling oil prices Mr Draghi and the rest of the ECB are likely to remain cautious about further falls in inflation. With this in mind Mario Draghi stated that he has “plenty of instruments” which in layman terms means that the Central Bank could consider cutting interest rates or deposit rates further or even increasing the amount of money the Bank are putting into the economy via Quantitative Easing (QE). As we have seen in the past the fact that QE essentially means increasing the supply of money in an economy it can weaken that currency’s value. So, even the mere threat of an increase in the QE program can lead to a currency weakening and this is what we have witnessed during and following the speech from Mr Draghi. Euro exchange rates have moved significantly during this afternoon’s trading reaching highs against the Pound Sterling (GBP) of 1.3086 and lows of 1.2914, and highs against the US Dollar (USD) of 1.0921 and lows of 1.0776.