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Looking for FX divergence

Ultimately, what FX markets need is policy divergence between central bank policies of different currencies. We’re not quite there yet, because most of the debate is surrounding QE (ending or starting) and the potential for rate hikes (in the US and UK) more likely in 2015. This will likely remain the case this week as the European Central Bank meets for its policy meeting. The latest numbers on inflation and the perceived change in tone from the head of the ECB last month has increased speculation that we may see further policy action form the ECB. But the options available to them are still limited and in some cases, not fully formed, so from a practical viewpoint, there is still a sense that they are not able to launch the big ‘bazooka’ that many in the market would like to see. The ECB meets on Thursday, with the euro likely to be a little more volatile into the run-up as speculation continues over policy.
For today, we’ve already seen the release of final GDP data for Germany, which has confirmed the 0.2% decline and revealed weakness in both construction and capital investment. The new month has seen sterling catch a bit into the European session, cable moving back above the 1.66 level, something it has not managed to sustain for the previous three sessions. The Bank of England also meets on Thursday of this week, but no action is likely to be seen, with the interest likely to be with the minutes released mid-month. A additional member voting for higher rates would keep alive the potential for an increase in rates this month. Note that today is Labor day in the US, which will keep activity subdued in FX markets.

Further reading:

EUR/USD Sep. 1 – Remains on the floor Ukraine news weighs

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