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Sterling slides to one-month low versus euro.

Mon 26 September 2016

Highlights from last week:

  • Sterling/euro finishes week at €1.1544
  • Sterling/US dollar closes at $1.2959
  • Dollar losses short-lived after Fed holds rates

The week ahead:

  • US services sector activity data (Tuesday, 14.45pm)
  • Euro zone consumer price inflation data (Friday, 10.00am)
  • UK services sector output data (Friday, 9.30am)

View exchange rates and interest rates

Brexit fears overshadow brighter UK data

The pound dropped to a one-month low of €1.1518 against the euro on Friday. This followed comments from Foreign Secretary Boris Johnson suggesting the UK could begin the formal process of withdrawing from the EU early next year.

Sterling had generally been holding its ground versus both the US dollar and euro up to this point. Although there were few domestic data announcements to provide the pound with direction last week, the currency had found some support earlier on Thursday after the Bank of England’s Kristin Forbes said she sees no need for another interest rate cut following a brighter spell of UK data recently. Forbes sits on the Bank’s nine-member Monetary Policy Committee which voted to lower UK interest rates to 0.25% in August. Her comments contrast with the majority on the committee who believe a further cut could be warranted later this year.

Even Friday’s disappointing euro zone PMI (Purchasing Managers’ Index) data couldn’t dent appetite for the euro. The composite PMI index slipped from 52.9 to 52.6 in September, weighed down by weaker services sector activity. Whilst it’s difficult to read too much into one month’s numbers, the data added to concerns that growth across the region might be slowing.

US Fed leaves rates on hold – December eyed for possible next move

Prior to the pound’s drop on Friday, sterling had managed to climb back above $1.30 against the US dollar after the Federal Reserve opted to keep interest rates unchanged as expected. The dollar’s losses were limited by confirmation that three policymakers voted to lift interest rates immediately, with most members of the rate-setting panel believing interest rates should rise before the year end. If interest rates are to rise in 2016 a move in December looks the more likely scenario since November’s meeting is set to take place just one week ahead of the US Presidential elections.

Other central banks from around the globe were also in focus

The Japanese yen weakened slightly as the Bank of Japan changed tack in its efforts to push inflation up to 2%, although these losses were generally short-lived. The Bank of Japan kept interest rates at -0.1%. After a comprehensive review of its stimulus measures it will now try to spur growth and push inflation beyond 2% by capping long-term government bond yields at zero rather than committing to a pre-set level of bond purchases.

Mid-week the pound dropped to an all-time low of NZ$1.7609 against the New Zealand dollar. However, these losses were overturned after the Reserve Bank of New Zealand failed to rule out further interest rate cuts despite leaving them on hold at 2% this time around.

Other central bank meetings followed from Norway and South Africa. The Norwegian krone jumped more than 1% against sterling after the Norges Bank kept interest rates on hold at 0.5% and said the likelihood of a cut further down the line had now diminished. The sterling/South African rand rate fell to one-month lows under ZAR17.50 after the Fed’s decision not to raise interest rates boosted appetite for higher yielding currencies. However, the rand pared a small portion of its gains after South Africa’s Reserve Bank kept its benchmark interest rate at 7%. The Reserve Bank cited weak economic growth as balancing out its concerns over above-target inflation (which is expected to average 6.4% this year compared to its 3-6% target range).

Sterling also fell below A$1.71 for the first time in a month. The Australian dollar had already found some support after relatively upbeat minutes from the Reserve Bank of Australia’s latest policy meeting said record-low interest rates of 1.5% are helping to underpin growth despite lower mining investment.

The week ahead

UK data this week will shed further light on the post-referendum economic landscape. July’s service sector output data will be released alongside a third estimate of second-quarter GDP data (Friday, 9.30am). Domestic household spending and confidence will also be in focus. The CBI Distributive Trends Survey (Tuesday, 11.00am) offers an indicator of September’s retail trends, with August’s mortgage approvals data (Thursday, 9.30am) and consumer confidence data (Friday, 00.01am) also due.

Whilst euro zone business and consumer confidence readings (Thursday, 10.00am) will attract some attention, Friday’s unemployment and consumer price inflation data (10.00am) are likely to be the more important gauges of the region’s economic standing.

A packed US economic includes new home sales data (Monday, 15.00pm), services PMI activity survey data (Tuesday, 14.45pm), durable goods orders (Wednesday, 13.30pm), pending home sales (Thursday, 15.00pm) and personal incomes data (Friday, 13.30pm).

View UK, US and euro zone announcements with our economic calendar

Other key data releases:

Japanese retail sales data (Thursday, 00.50am), consumer price inflation data (Friday, 00.30am) and unemployment data (Friday, 00.30am)

Chinese manufacturing PMI data (Friday, 2.45am)

Canadian GDP data (Friday, 13.30pm)

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