The Euro recovered on Monday, rallying off a near three month low against the US Dollar ahead of this week’s European Central Bank (ECB) monetary policy meeting.
Figure 1: Eurozone Inflation Rate (2009 – 2016)
Sterling had a relatively quiet session in comparison to the recent violent movements we’ve become accustomed to. Traders remained in a cautious mood as far as the Pound was concerned, with the British High Court holding its second day of hearings on the right to approve the terms of the Brexit vote.
Investors instead focused on comments from Bank of England member Ben Broadbent who claimed that the fall in the Pound was acting as a ‘shock absorber’ for Britain’s economy.
Inflation data in the UK and US today will be the main focal points for currency trading. Inflation in the UK is forecast to have picked up pace in September, with consensus pointing to a 0.8% reading compared to August’s 0.6%. The effect of a weaker Sterling post-Brexit is, in our eyes, almost certain to drive inflation even higher in the coming months, with BoE Governor Mark Carney last week explicitly warning that higher domestic prices were coming.
US inflation at 13:30 UK time is also expected to accelerate to 1.5% from 1.1%, which we think would provide further incentive for the Federal Reserve to hike interest rates before the year is out.
Major currencies in detail:
GBP
The Pound rose 0.1% against a broadly weaker US Dollar on Monday.
The UK economy is in for a ‘prolonged period of weakness’ according to the latest EY Item Club report, which offered a fairly damning view of the UK economy post-Brexit. While the report suggested that the UK economy would grow by a relatively healthy 1.9% this year, a rise in inflation is expected to lead to slower growth next year.
Meanwhile, BoE member Ben Broadbent appeared to rule out the possibility of currency intervention by the Bank of England, despite the Pound falling to multi-year lows against its major peers.
Inflation figures this morning will be the highlight in the UK today, although the Pound continues to be driven largely by political factors.
EUR
The single currency steadied itself around the 1.10 level against the US Dollar yesterday, buoyed by a slightly weaker Greenback.
The final inflation estimate in the Eurozone remained unrevised on Monday from the preliminary estimate, with headline consumer prices growing by just 0.4% in September, albeit at a slightly faster pace than in August. The recovery was driven almost entirely by energy prices, with global oil prices now finally beginning to stabilise above $50 a barrel. Despite the slight uptrend, inflationary pressure remains very weak, and more than justifies the ECB’s existing accommodative monetary policy stance.
With no major economic releases at all in the Eurozone today, the single currency will largely be driven by events elsewhere. The ECB’s meeting on Thursday will be the main event to look out for this week.
USD
The US Dollar index fell 0.15% as markets opened for the week on Monday.
A broadly weaker Dollar came after a relatively disappointing manufacturing report out of the US economy. The Empire State manufacturing index dropped for the third month in a row, showing a sharp contraction in manufacturing activity in the New York region. The reading of -6.8 is the lowest since May, with a strong US Dollar and weak external demand continuing to weigh heavily on the industry.
Fed vice Chair Fischer also spoke yesterday, although wasn’t overly hawkish, claiming that wages in the US would not rise without increasing inflation.
This afternoon’s inflation numbers are likely to be the main market mover today. US housing data on Wednesday will be overshadowed by expectations for Thursday’s ECB meeting.
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