Catalan referendum weighs on Euro, Sterling sinks on weak data

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3 October 2017

Matthew Ryan

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

The controversy surrounding the Catalan independence referendum did little to support the Euro on Monday, with the currency sent crashing to a six week low against a broadly stronger Dollar this morning.

C
atalan’s referendum, which was passed by a comfortable 90% in favour of independence over the weekend, has presented one of the biggest constitutional crises in the country in decades. The Catalan and Spanish governments have clashed on the legality of the vote. Madrid has already flat out refused to acknowledge the result of the referendum and neither side are likely to come to a compromise at this juncture. The uncertainty surrounding the vote is unlikely to go away anytime soon and an escalation in the violence that has preceding it would be particularly negative for the common currency.

On the macroeconomic front, yesterday’s manufacturing PMI also dragged on the Euro. The index declined to 58.1 from 58.2, albeit remaining at a very healthy level that suggests the Eurozone economy remains on track to post another quarter of healthy growth in Q3. ECB member Praet was also fairly dovish in his speech yesterday, claiming that there was not much sign of convergence in inflation towards target.

Pound slips as manufacturing activity slows

Sterling slumped by almost one percent against the US Dollar on Monday after a disappointing manufacturing PMI adding to growing concerns about the state of the UK economy.

Yesterday’s manufacturing index dipped much more than expected in September, falling to 55.9 from a downwardly revised 56.7. Fears over Brexit and rising production costs were partly to blame and offset the boost exporters received from the weaker Pound. This comes hot off the heels of last week’s second quarter growth data which showed that the economy grew by just 0.3% in the three months to June, suggesting that policymakers in the UK may be reluctant to hike interest rates for the first time in a decade this year. The market had increasingly come around to the idea that the Bank of England would raise rates at its next meeting in November following a series of recent hawkish communications and rising inflation.

Investors also have one eye on the four day Conservative Party conference this week. Following a fairly disastrous election performance, PM May’s leadership is likely to be under heavy scrutiny.

US Dollar rally continues, Fed speakers in focus

Contrasting economic news in the US helped to the Dollar index end the London session higher again on Monday following a run of four consecutive weekly gains. The US manufacturing index jumped to its highest level since 2004, boosting bets that the Federal Reserve will raise interest rates for the third time in a year at its December meeting. The index increased to 60.8 last month from 58.8 even amid both Hurricane Harvey and Irma that are expected to weigh on growth in the second half of the year.

Federal Reserve speakers will be the main draw in the US again this week as investors continue to reprice their expectations for the likelihood of a hike in December. FOMC Powell will be speaking today, followed by Chair Yellen in Missouri on Wednesday.