Following a hydrogen (nuclear) bomb test underground in North Korea, US Defence Secretary General Mattis literally rattled his sabre and Trump has suggested that the United States might embargo all trade with countries that do business with North Korea. Interestingly that list includes a number of otherwise allied trading partners such as China, India, Philippines, Taiwan, France, Russia, Brazil, Mexico, Germany, Turkey, Egypt, Chile and keepers of the shiny orb Saudi Arabia. There’s not a huge amount to joke about this week but looking for positives, JPY and gold (haven assets) have rallied over the weekend and this morning…. which is nice.
In summary for today, USD has weakened against all standard basket currencies, the EUR is up and GBP is flat. This week, other than the obvious, the biggest event is likely to be the European Central Bank meeting on Thursday.
GBP/USD managed to recover on hopes for a softer Brexit and mixed movements in the US. The UK’s Services PMI (Tuesday morning) and trade balance (Friday) stand out as the two biggest data influencers in the first full week of September after the US jobs report missed expectations creating only 156,000 jobs in August compared to the 180,000 expected. The US unemployment rate pushed back up to 4.4% as the number of unemployed stood at 7.1 million.
Markets were expecting unemployment to remain unchanged at 4.3%. A slowing labour markets and concerns over Trump will continue to dampen investor’s hopes of a US interest rate rise in December so you have a case of Tweedle Dee and Tweedle Dum to keep USD and GBP relatively range bound.
The slow pace of the weak and wobbly Brexit negotiations joins the slow pace of the economy for the UK. While the US economy has its own troubles, the pound remains under immense pressure. Clients with USD requirements might wish to take advantage of the recent moves by securing funds with a series of spot and forward contracts.
GBP/USD movement can be seen on the graph below:
The only good bit of news coming out of the UK this week that might overshadow the terrible cricket results is that The Duke and Duchess of Cambridge are expecting their third child and heir to the throne. It is unlikely to be enough to prevent further losses for GBP against EUR.
The EUR uptrend is largely justified as the euro-zone largely enjoys stable politics, a central bank that is moving towards the exits (even if gradually) and robust growth. The UK is suffering from continuing Brexit woes and the Commons is set to debate the government's Brexit repeal bill on Thursday which can only lead to greater uncertainty. On that, I am uncertain if it if possible to reach peak uncertainty or if it is a circular concept where one can be so uncertain that there evolves other certainties….. anyway, the US suffers from bad politics, slowing growth and a central bank that is hesitating as well so it will be hard for Draghi to convince us that he is dovish when everything seems to be on the right track for the EUR.
Clients selling GBP may want to hedge further downside risks by securing funds on spot or forward contracts before Thursday morning.
GBP/EUR movement can be seen on the graph below:
The Jackson Hole Symposium pushed EUR/USD higher ultimately making a short-lived breakthrough above 1.20. Reports that the ECB does not like the current strength of the currency outweighed higher inflation in the euro-zone. The downfall was also driven by a stronger US dollar. Apart from a necessary correction, USD enjoyed positive economic data: GDP growth came out at the robust level of 3% and other data was also supportive.
Thursday is a big deal with expectations of the ECB possibly announcing the tapering of Quantative Easing and if so, by how much? These are the open questions that keep EUR/USD on the edge. We know that the ECB will decide something this autumn because of ECB President Mario Draghi’s previous statements. The bond-buying scheme currently consists of EUR60bn euros per month until the end of 2017 and the big question is for the future of the program in early 2018. Will they make another reduction of EUR20bn but continue the program for longer? Or will they reduce the scale on a monthly basis and end it soon? The ECB could also delay the decision to the October meeting, but making a decision now makes more sense.
Euro movement against the Dollar can be seen on the graph below:
Not trading your currency is still a risk. The markets will move, volatility and relative values will vary but whatever your foreign currency exchange and international payment needs, you can rely on the team here at Aston Currency Management. Please do not hesitate to get in touch with us, we look forward to hearing from you. Now, if you will excuse me, I have to build a nuclear winter proof ark. Have a great week.
Written by Damien Lipman