US Dollar up, Euro down ahead of Bank of England interest rate decision
05/Nov/2015 • Currency Updates•
The US Dollar soared against its major peers yesterday, while the single currency plunged dramatically to its weakest position against the Greenback since mid-July ahead of “Super Thursday” and the US labour report on Friday.
Volatility levels as we saw yesterday can have a significant short-term impact on businesses exposed to even the most traded currencies in the world.
Today’s twin releases of the Bank of England’s monetary policy minutes and quarterly Inflation Report at 12:00pm will be of high importance to UK businesses trading the Pound. By this afternoon we should have a much better indication of the timetable for the first interest rate increase in the UK since the financial crisis. Volatility and unpredictable GBP movements are to be expected.
Market pricing for a December lift-off from the US Federal Reserve continued to surge north of 50% yesterday after Fed Chair Janet Yellen suggested that an interest rate increase next month is becoming a distinct possibility.
Yellen, testifying in front of Congress in Capitol Hill, claimed that the US economy was “performing well” and that a December hike was a “live possibility”, as is our expectation. Again, she reiterated that this would be data-dependent. Yesterday’s rally was given further impetus by strong employment data that bodes well for Friday’s crucial nonfarm payrolls report.
The December FOMC meeting causes a degree of concern for UK and European firms buying from the US as their costs may be increasing as early as this year as a result of the Fed decision.
The economic outlook for the Euro continues to decline, to the extent that the ECB could be considering pushing the interest rate on deposits further into negative. Therefore, the Pound seems very likely to strengthen against the Euro into 2016.
Major currencies in detail:
Yesterday proved to be a mixed day for Sterling, with the currency declining by 0.35% against the US Dollar on the back of broad Greenback strength, while climbing by 0.4% versus the Euro.
There were further encouraging signs of strength of the UK economy yesterday morning. The latest services PMI for October climbed from its 18-month trough last month, increasing from 53.3 to 54.9.
While encouraging, it is worth noting that this rise in business confidence is against its lowest level in two-and-a-half years. Nonetheless, combined with improved manufacturing growth on Tuesday, this should bode well for fourth-quarter UK economic growth.
All attention today will be on the Bank of England. Of key importance to the Pound will be both the number of dissenters for an interest rate increase and the tone of the minutes and Inflation Report.
Given last week’s soft GDP report, we expect the voting pattern to remain unchanged at 8-1. Any hawkish comments, which possibly signal a rate hike is imminent over the next six months, could send the Pound higher today.
The single currency tanked across the board yesterday, with dovish comments from Mario Draghi continuing to weigh on the Euro. EUR/USD ended 0.7% lower.
Draghi’s comments, which suggested that the ECB was ready and willing to act, led to an increase in bets that the central bank would be ramping up its already-large quantitative easing measures at its next meeting in December.
He also suggested the Governing Council would use all instruments available. This implies that the ECB could be considering pushing the interest rate on deposits further into negative.
Euro weakness was compounded by the Markit services PMI, which fell to 54.1 from 54.2. This dragged the composite index, which includes manufacturing, down to just 53.9.
The ECB’s economic bulletin and Eurozone retail sales this morning will largely be overshadowed by announcements in the UK today.
The US Dollar index rallied by 0.6% yesterday to its strongest position since August, following hawkish comments from Yellen and a string of impressive economic data, which painted a strong picture of US economic performance.
The monthly employment change figure from ADP, which measures the number of jobs added to the US private sector, came in mostly in line with expectations. Private employers added 182,000 jobs in October, slightly down on a month previous, although marginally above forecasts.
Such a solid number bodes well for Friday’s critical nonfarm payroll figure. The general consensus is for a reading in the region of 180,000 job creation which would, in our view, keep the Fed on course for an interest rate hike next month.
Elsewhere, the ISM nonmanufacturing PMI surged well above forecasts to 59.1 last month from 56.9 in September, while the services PMI from Markit also improved on last month to post a reading of 54.8. Moreover, the trade deficit narrowed to just $-40.80B, all of which are USD positives.
Jobless claims and a speech from Fed member Fischer today will be worth noting, although almost all attention will be on Friday afternoon’s US labour report.
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