Sterling, Euro and Yen surge as investors cut back expectations for Fed rate hikes

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3 August 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling climbed more than 1% against the Dollar on Tuesday to its strongest position since mid-July, with a much better than expected construction PMI allowing for some respite ahead of Thursday’s crucial Bank of England meeting.

I
ncreased expectations that the Federal Reserve might delay its next interest rate hike sent the Dollar lower across the board yesterday. The Euro subsequently surged to its highest level against the Greenback since the Brexit vote in June and back above the 1.12 level. We think Friday’s US nonfarm payrolls figure could provide a catalyst to reverse the recent downward trend in the Dollar.

The Japanese Yen also rallied sharply to its strongest position in over three weeks on Tuesday with markets completely underwhelmed by Prime Minister Shinzo Abe’s disappointing fiscal stimulus package.

Aiming to revive its flagging economy, the Japanese government yesterday announced the details of its 28.1 trillion Yen package, with investors clearly unimpressed that only around a quarter of this figure will be allocated to direct spending. We’re very sceptical of the government’s claims that this could raise GDP by 1.3% in the near term, barring any additional monetary policy action from the Bank of Japan.

The Yen continues to be one of the most volatile currencies, having sold-off heavily last week on concerns that the BoJ may have reached the limit to its monetary easing. With the Yen now approaching the physiological 100 to the US Dollar level, speculation has increased that the BoJ may be forced to intervene in the currency market in order weaken the currency.

Elsewhere, the Australian and New Zealand Dollars both trended higher for the day following less dovish than expected rhetoric from the Reserve Bank of Australia.

The Polish Zloty also ended as one of the best performing currencies in the world following the announcement that plans to convert Swiss Franc mortgages into Zloty’s would be delayed.

Major currencies in detail:

GBP

The Pound rallied 1% on Monday, buoyed by better than expected construction PMI figures and a broadly weaker US Dollar.

Construction activity fell to its lowest level in 7 years in July, although suffered a more modest deceleration than first feared. The monthly PMI declined to 45.9 from 46, defying expectations of a much steeper drop to below the 44 mark (Figure 1).

Figure 1: UK Purchasing Managers’ Indexes (2014 – 2016)

This reading will of course have little bearing on the Bank of England, which remains firmly on course to cut rates for the first time in 7 years this week.

The revised services PMI could prove key for Sterling this morning. The Bank of England’s monetary policy committee will also be commencing its two day meeting today.

EUR

The Euro rose 0.4% to a five week high on Tuesday, with dimming expectations for a September interest rate hike by the Federal Reserve providing good support for the single currency.

Producer prices also provided a modest boost for the Euro yesterday. The producer price index increased by a better than expected 0.7% in the month to June. Unemployment in Spain also impressed again in July with the jobless total falling by over 2% from a month earlier.

With limited major announcements in the Euro-area this week the single currency continues to be buffeted by movements in the US Dollar and swings in investor sentiment.

This morning’s final PMI readings in the Eurozone will be the main economic release in the Euro-area, with retail sales expected to print flat.

USD

Sentiment towards the US Dollar continued to remain poor yesterday off the back of last week’s fairly disappointing first quarter GDP numbers. This sent the Dollar index 0.6% lower on Tuesday.

Economic data out of the US yesterday came in mostly as expected. Consumer spending and income growth both remained unchanged in June at a solid 0.4% and 0.2% respectively. With spending strong and last quarter’s weak growth data largely attributed to temporarily lower inventories, we think the US economy should pick up pace in the coming quarters.

Today’s private sector employment data from ADP at 13:15 UK time could give us a decent indication as to the strength of Friday’s nonfarm payrolls number. A disappointing reading this afternoon will keep the US Dollar firmly on the back foot today.

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