At the end of last week foreign exchange markets closed with Pound Sterling under pressure from the Scottish referendum, while the Euro closed slightly up against the US dollar and the Pound. Forecasts for this week’s activity cite the potential for more market activity for conversion rates across the board.

Exchange rates:

The pound to US dollar exchange rate: 1 GBP converts into 1.6233 USD.
The euro to US dollar exchange rate: 1 EUR converts into 1.2945 USD
The euro to pound exchange rate: 1 EUR converts into 0.7973 GBP.

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GBP Pound: Scotland focus

Pound Sterling ended the week up as the polls showed Scots favouring staying in the UK. But Sterling remains vulnerable to continued volatility - it also hit a month low of 1.6071 against the US dollar during the week.

 

More financial and retail businesses continue to speculate on the possible repercussions of Scotland leaving the UK: from price hikes to major relocations.

 

Even after the referendum, there is a lengthy time frame for important negotiations regardless of a ‘Yes’ or ‘No’ result as Westminster promises more powers to Scotland if there’s a ‘No’ victory.

 

So a high degree of uncertainty is likely to occur and high risk UK premiums are likely over a period.

Euro: ECB liquidity injection potential

The euro has held above its recent 14-month low against the dollar, closing slightly up over the week.

 

The single currency remains vulnerable in the near-term, given its recent lows. Look out next week for the results of the ECB’s first auction on its new targeted long-term refinancing operations (TLTROs).

 

The auctions are intended to inject liquidity into banks for lending to the private sector (excluding house purchases), therefore potentially lifting inflation and real activity. The German ZEW index is expected to take a further small drop for September, probably on the back of ECB support and a weaker Euro.

 

US Dollar: Strong promise

August Retail Sales report released Friday shows that the US economy continues to grow strongly, better than anticipated at 0.3% versus 0.2% expected.

 

Investors continued to favour the US dollar as it remained within sight of a 14-month high this week. This strong economic data provides increasing optimism for America’s recovery, with borrowing costs potentially rising sooner than expected.

 

Two things to look out for from the Fed next week will be whether it changes its forward guidance on how close it is to its long-term goals and whether the projections for the first hike will be moved forward.