Investors continue to sell the euro (EUR) at the start of November; at the same time we see the British pound (GBP) and US dollar (USD) are being bid higher as their respective economies outperform G10 counterparts.
Comparing the performances in the pound and dollar we note GBP/USD is also pressured suggesting to us appetite for the dollar remains robust overall.
That said, Monday's UK Manufacturing PMI release came in well ahead of analyst expectations suggesting there could be more upside in the GBP complex this month. We will however have to see what the Services and Construction PMI's look like.
For the euro Thursday's meeting could provide volatility. Below, we explore further the current dynamics driving the EUR, USD and GBP and ask where they are headed next.
Exchange rates today, for reference (Tuesday):
- The pound to euro exchange rate (GBP/EUR) is 0.01pct lower on a day-to-day comparison at 1.2796.
- The pound to dollar exchange rate (GBP/USD) is 0.20 pct higher at 1.6005.
- The euro to dollar exchange rate (EUR/USD) is 0.17 pct lower at 1.2503
The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.
The Euro: Hammered by a Bevvy of Poor Data, ECB Next
It is not often that you see such sharp moves in the pound euro exchange rate - the sudden jump higher in the rate comes on the back of a sharp deterioration in expectations regarding the outlook for the Eurozone economy.
Driving the sell-off was news that Eurozone inflation rose by a whisker at 0.4% September, the shared currency would have required a stronger reading to encourage markets that the economy was strong enough to generate inflation.
However, it was news that the Germany economy is starting to stutter that really got traders pressing the sell button.
Retail Sales (MoM) (Sep) fell by a whopping 3.2% - analysts had expected the rate to decrease by 1%.
When the largest economy in the Eurozone - and the greatest prop to the euro - delivers such data traders and investors take notice.
Bets are growing that the European Central Bank (ECB) will deploy a sense of urgency in its efforts to prop up the economy.
Could we see action as early as next week's meeting?
We note a number of analysts are sceptical that the ECB will do anything at all. If this is the case there is a strong chance the euro will rally higher.
However, any strength should be seen as a fresh selling opportunity says Peter Rosenstreich at Swissquote Bank:
"This weekโs ECB meeting will be critical in providing insight into the ECB thinking (via ECB Draghi accompanying press conference), but is widely expected to hold monetary policy unchanged. The ECB will still want to see the effect of additional measures before considering new actions. We see any rally in EURUSD (post-press conference) as an opportunity to reload on shorts."
The British Pound: A Busy Week Starts With a Bang
The pound sterling has been a passenger for much of the week past.
This is all due to change in coming days with the following three data points set to catch the attention of the markets:
1) On Monday look out for Markit Manufacturing PMI (Oct). Analysts expect a reading of 51.2. The GBP was boosted after the reading came in at 53.2, a comfortable beat on expectations.
2) On Tuesday look for Markit PMI Construction (Oct). Expectations are for a reading of 63.5.
3) On wednesday it is the turn of the Services PMI. Analysts are watching for 58.5.
The big event of the month will however be the Bank of England's Quarterly Inflation Report (QIR). This is due out on the 12 of November and markets will be keenly interested to hear whether or not the Bank of England will strike a more cautious tone on the economic outlook.
We note sentiment has improved lately with the massive Japanese stimulus likely to prop up sentiment at a time when the US Federal Reserve is pulling back on its supportive policies.
This could see the Bank strike a neutral tone. Because expectations for a negative-sounding QIR have risen anything neutral will likely prop up the sterling exchange rate complex.
US Dollar: On the Front-Foot
The US dollar index rallied to near its highest level in four-years after a surprise move by the Bank of Japan sent dollar/yen rocketing to a new seven-year peak.
The shocker from the BOJ highlighted the notion that the Fed is moving, albeit slowly, in the direction of monetary policy normalization, while other major central banks, namely the ECB and BOJ remain clearly biased toward more easing.
"The resulting yield advantage the dollar is enjoying over its other major rivals continues to drive investors out of lower returning currencies and into the dollar. Yesterdayโs stronger than expected reading of Q3 GDP underscored the notion that America is leading in both recovery and monetary policy normalization, an idea that many investors see as a foundation for a multi-year bull market for the dollar," says Omer Esiner at Commonwealth Foreign Exchange.
Pound Dollar Outlook
The pound has actually recovered some lost ground against the US dollar as we head to the session close.
The move higher back towards support at 1.60 is significant - the GBP/USD finds this area particularly sticky and it will take some negative GBP-related news to push GBP well and truly below here.
We await next week's data to find out whether this push is forthcoming.
