Headlines
• UK Q3 GDP due this week –
Deceleration from 0.7% to 0.6% expected.
• GBP/EUR hits two-month high –
On enhanced ECB easing bets.
• GBP/USD sinks 100-pips –
PBoC rate cut improves 2015 Fed hike bets.
• Commodity bloc down after China rate cut –
Concerns over health of Chinese economy.
Sterling
The big event on the British economic calendar this week is the third quarter UK GDP report, predicted to show a slight slowdown from 0.7% to 0.6%, but that isn’t due for release until Tuesday and therefore today’s session is unlikely to see any large swings in demand for Sterling.
Slowdowns in private sector PMI indexes have suggested that gross domestic output decelerated in the third quarter but last week’s robust two-year high retail sales report gives hope that Britain’s bullish recovery could continue. A score of 0.5% or lower could send the Pound down tomorrow but anything above 0.7% could give Sterling a sizeable boost.
Euro
The Pound to Euro exchange rate touched a fresh two-month high on Friday, registering a 40-pip appreciation, as investors continued to price-in the possibility of further easing from the European Central Bank.
On Thursday afternoon ECB President Mario Draghi struck a decidedly dovish tone, indicating that the central bank is in ‘work and assess’ rather than ‘wait-and-see’ mode and his remarks were interpreted by traders to suggest that further monetary stimulus will be added before the end of the year. Draghi’s employment of the term ‘vigilant’ drew similarities to his predecessor, Jean-Claude Trichet, who often spoke of being vigilant in the run-up to changes in monetary policy.
Data released on Friday related to the Eurozone economy actually impressed, with service sector output rising unexpectedly from 53.7 to 54.2, but it was not enough to counter the negative sentiment towards the single currency deriving from increased ECB stimulus bets.
US Dollar
Sterling stumped by around a cent against the US Dollar to strike a 10-day low on Friday due to a shock announcement in China.
The People’s Bank of China (PBoC) surprised markets by announcing a 25 basis point cut to its benchmark one-year interest rate from 4.60% to 4.35%. The one-year deposit rate was also cut by 25 basis points, from 1.75% to 1.50%. The accommodative policy decision bolstered the appeal of the ‘Greenback’ because it was seen to boost economic prospects in China and therefore reduce concerns held by Federal Reserve policymakers that weaker Chinese growth could weigh on commodity prices and therefore on global and US inflation prospects.
Taken with the ECB’s extremely dovish speech on Thursday, Friday’s surprise PBoC rate cut was seen to put a 2015 Fed rate hike back on the table. However, only around 7% of investors expect the US central bank to tighten in October (the announcement takes place later this week) and 63% reckon President Janet Yellen’s policy committee will leave rates at rock bottom levels through the rest of the year.
Canadian Dollar
The Pound rallied minimally against the Canadian Dollar on Friday as Canadian consumer prices dipped from 1.3% to 1.0%, disappointing expectations of 1.1%.
The softer-than-anticipated inflation numbers hurt the ‘Loonie’, which was also impacted by the PBoC rate cut. Although the addition of further stimulus in China is likely to boost economic output and subsequently have a positive impact on the Canadian economy due to enhanced liquidity and increased demand for North American exports, the surprise move was seen as a sign of panic and this weighed on demand for high-risk assets such as the Canadian Dollar.
Australian Dollar
Sterling registered a slender set of gains against the risk-correlated Australian Dollar on Friday as markets reacted anxiously to the surprise reduction of rates in China. A mix of enhanced Fed rate hike bets and concerns that the situation in China is grave enough to warrant six rate cuts in just 12 months prevented the ‘Aussie’ from gaining on the Chinese stimulus announcement.
New Zealand Dollar
The Pound completed a clean sweep against the commodity bloc on Friday by rallying slightly against the New Zealand Dollar. Once again it was a combination of (slightly) enhanced Fed rate hike bets and fears that the Chinese economy is in a worse state than originally estimated that reduced demand for the high-risk ‘Kiwi’ Dollar following the Chinese rate cut announcement.
Data Released Today
10:00 EUR German IFO – Business Climate (OCT) Medium 107.8
10:30 GBP BBA Loans for House Purchase (SEP) Medium 47400
15:00 USD New Home Sales (MoM) (SEP) Medium -0.4%