Two weeks ago, the European Central Bank held its latest monetary policy meeting and did nothing, but expectations are that they will begin to reduce their programme of quantitative easing soon, probably in October. Then, last week the Bank of England held their meeting and also did nothing, although they strongly hinted that they would increase interest rates sometime in the near future, possibly in November. And this week, the Federal Reserve holds its latest monetary policy meeting and is also expected to do nothing but, unlike the other two, it may hint that the prospective interest rate rise in December is unlikely given tightening US economic performance.
The main beneficiary of this has been sterling, especially against the US dollar. However, this could all change if the rhetoric from the BoE turns out to be just hot air.
Speaking of hot air, over the weekend we had Boris Johnson successfully muddying the waters for Theresa May’s keynote speech on Brexit later this week with his 4000-word article in The Telegraph. Most see it as an attempt to grab the party leadership. As yet it hasn’t blown sterling off course.
There is still plenty of time to register for our Revenue Risk in International Supply Chain Challenges webinar, where our very own Kevin Bottwood will be joined by SEKO’s Keith O’Brien to discuss how currency volatility is impacting on profitability and the challenges this poses to the logistics and supply chain sector. Finally, we published our latest Forbes article last week, which looks at the events over the last week in more detail.
GBP: Vlieghe comments send sterling soaring
The end to an impressive week for sterling saw BoE policymaker Gertjan Vlieghe suggest that UK interest rates might need to be raised and – importantly – said the Monetary Policy Committee are unlikely to stop at one rate hike. This came a day after Governor Carney acknowledged that rates might have to increase soon.
Sterling continued its rally against the US dollar as a result and hit its highest level since the day of the EU referendum result. However, not everybody is convinced that the sentiments expressed are genuine; it’s entirely possible that MPC members are talking up the UK economy to strengthen sterling without actually doing anything. It makes for a fascinating build up to the next rate decision.
Today we’ll see Carney deliver his speech which could well enable sterling to continue its momentum. On Wednesday we’ll see retail sales, while Friday has the quarterly and annual GDP growth rate. It will be fascinating to see whether the figures support what BoE members have been saying about the UK economy.
The chart below shows sterling movements against the dollar from Friday 8 September until today. As you can see, it really was a good few days for the pound.
EUR: after taking a breather it’s a busier week for the eurozone
A quiet week for the eurozone saw it weaken against sterling which had an extremely positive run. This week is busier for eurozone economic data so it will be interesting to see what happens to the GBP/EUR pairing.
Today we have the inflation numbers, while on Tuesday the German ZEW Economic Sentiment Index is released. This is a key piece of data as it surveys up to 300 experts from banks, insurance companies and financial departments. They are asked for their expectations on a variety of topics concerning the economy.
On Thursday we have the eurozone consumer confidence report and then, on Friday, we’ll get the German manufacturing purchasing managers’ index (PMI) and the eurozone’s services and manufacturing PMI. If the figures are positive we can expect to see some strengthening in the euro.
USD: disappointing end to the week for weakened US dollar
The US dollar suffered further losses against sterling yesterday as BoE policymaker Gertjan Vlieghe reinforced the idea that UK interest rates would have to rise soon and likely more than once. In addition, there was some disappointing data from the US as retail sales unexpectedly fell by 0.2% in August, against an expectation of a 0.1% rise.
However, Hurricane Harvey can at least partly be seen as a cause as it wreaked havoc and caused significant disruption. Having said this, there was a 0.3% rise in July so it is quite a drop. Consumer confidence in the US is currently close to record highs so it is reasonable to expect retail spending to recover in the next few months, but nobody can be sure.
Industrial production also fell in August. The 0.9% drop came against an expectation of a 0.1% increase, while manufacturing output also sank by 0.3%, when a 0.3% increase had been forecast. This has led many to believe that another 2017 US interest rate rise is unlikely at best.
It’s a quiet start to the week for US economic data, but things heat up on Wednesday. We have the existing home sales but then comes the main highlight of the week: the Federal Reserve’s interest rate decision. We’ll also see the FOMC’s economic predictions followed by the Fed press conference. An exciting day for the markets.
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