Currency Note

Euro continues to strengthen as it hits a 23-month high against the US dollar

By Christopher Nye July 26th, 2017

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The euro is in the ascendancy. Even when the data released from the eurozone isn’t quite what has been forecast, it still shows significant growth, just at a slower rate than expected. The markets must be wondering how long can this march continue, especially as the IMF warned the European Central Bank yesterday not to reduce its programme of quantitative easing.

Meanwhile, the UK had some welcome respite from the underwhelming data of late as BMW has decided to build its fully electric version of the Mini in the UK. There had been speculation that Brexit might make BMW consider moving the project overseas but this is now not the case.

Later today, we are hosting the latest edition in our webinar series. It begins at 11am and it is free to register. If you can’t make it this morning don’t worry – it will be available to listen to for a few weeks after.

GBP: could GDP put further pressure on the Bank of England?

Sterling pushed higher against the US dollar yesterday, but was relatively stable against the euro. The CBI factory orders were a bit mixed; while factory output increased at the fastest rate since 1995, the new orders component showed that order books slowed slightly more than expected. In addition, Rain Newton-Smith, CBI Chief Economist stated that he believes this is a result of a weakening pound. Every cloud…

The index fell to +10 from +16 in June with forecasted number expected at +12. However, the figure was largely ignored as manufacturing only accounts for about 10% of Britain’s economic output. By way of comparison, the service sector accounts for around 75%.

The day ahead contains the biggest number of the week for the UK with the first release of the Q2 GDP number. The GDP numbers are released three times: preliminary, second estimate and final. These are releases on consecutive months and it is always the preliminary that causes the most volatility. It is forecasted that the UK grew by 0.3%, but there is some downside risk to this number as the retail sales have been weak of late.

As inflation is still above target, the Bank of England will be keen to see how growth has been affected by Brexit. A better-than-expected figure could ease the pressure on the decision surrounding raising interest rates. Meanwhile, a weaker figure will put pressure on the BoE to keep rates at a record low.

EUR: the EU-phoria continues with no signs of abating

The euro hit a fresh 23-month high against the US dollar before retracing slightly. The single currency already had some momentum from the figures released yesterday morning. The German IFO measures the business climate and hit its third record high in as many months, which beat consensus. This is another big positive, not just for the region, but also for German Chancellor Angela Merkel, who is seeking a fourth term in office.

The chart below shows the euro movements against the US dollar for the last month and it really helps emphasise how strong the euro is at the moment.

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The day ahead will be interesting and should have an impact on the direction of the EUR and USD pairing. The markets will be scrutinising the tone of the Federal Reserve for indications of the likelihood of a US interest rate hike in September.

USD: a big day for the US dollar today

The US dollar didn’t perform very well again yesterday, weakening against sterling and the euro. It fell to a 23-month low against the single currency.

However, it wasn’t all doom and gloom, as US consumer confidence hit its second highest level since 2000. It jumped to 121.1 this month from 117.3 last month, which is a four-month high. This was against Wall Street expectations of 116.5.

Later today we have the release of the notes from the FOMC meeting. If the Federal Reserve strike an optimistic tone then we could see an interest rate hike in September which could offset some of the recent weakening of the US dollar against the euro. On the other hand, a cautious FOMC would likely see the euro making further gains and perhaps even breaking through the highs of yesterday.

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