After a modest recovery last week, GBPUSD has resumed its downtrend, touching its lowest level since early February this week. This brings the tally to eight weeks of declines out of the last nine and a move of nearly 10 cents lower from the multi-year high established in July. The recent weakness has been driven by growing nervousness surrounding the Scottish independence vote on September 18th. The outlook for this pair remain poor over the next couple of weeks due to the combination of Scottish uncertainty and recent dovish comments from the Bank of England (BoE).
Despite its poor performance against the American Dollar, Sterling remains strong against the Euro, where sentiment is even worse. The ECB activity this week has helped drive GBPEUR back up towards the multi-year highs established during the summer. Given the economic concerns in the Eurozone this pair looks comfortable around current levels.
At its regular monetary policy announcement the European Central Bank (ECB) announced additional cuts to its benchmark interest rate, which wasn’t entirely unexpected. The announcement has pushed deposit rates in the Eurozone, deeper into negative territory. Meaning that European banks will be charged a premium for the security of parking their funds at the ECB. However the ECB surprised financial markets when it acknowledged that it was preparing to engage in quantitative easing (QE), perhaps as soon as next month.
When pressed for details of the QE discussions ECB president Mario Draghi was coy, though he did indicate that the ECB’s balance sheet will likely move back towards levels last seen in 2012, near 1-trillion Euros. This represents an approximate 50% increase from current levels. This news triggered the largest single-day drop in EURUSD in 3-years, the pair giving up about 1.5% as it plunged to its lowest level in over a year. Despite the fact that this pair has already given up almost 10% in the last few months the outlook remains negative. These expectations are driven by the ECB’s own economic forecasts, which suggest that the Eurozone will experience a prolonged period of fragile growth.
Looking to the week ahead, it’s the BoE Inflation Report hearings that hold the greatest degree of anticipation in financial markets. After a week where the attention of financial markets was elsewhere, BoE governor Mark Carney along with other member of the Monetary Policy Committee will be center stage when they testify at British Parliament. This gives elected officials an opportunity to cross-examine the BoE on their stewardship of the economy. There was surprise dissent at the last BoE policy announcement, where two members of the committee broke rank and voted to increase interest rates instead of maintaining them at the current historical low. With that in mind and Carney’s seemingly cold feet when it comes to the BoE’s plans to increase interest rates despite reasonably strong economic data, these hearings could prove rather engaging.
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