This week in the markets: Euro falls as banking crisis

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It’s been a quiet week in FX markets – traders and investors seem to have summer holidays on their minds.  Sterling slipped across the board on Tuesday, though, as the latest manufacturing production figure undershot expectations by some distance.  With the sector to expand by 0.4%, compared to April, the release showed an unexpected fall of -1.3%.

The corresponding Manufacturing PMI released on 2nd June had shown a slight fall from 57.3 to 57.0, so this result was very much out of the blue, catching the markets off-guard.  On the news, cable gapped from 1.7145 to 1.7085, its lowest level this month.  The year-on-year growth, which was expected to be 3.2%, came out at just 2.3%, badly affected by the steepest drop in output since Jan 2013.

The news would have dented the hopes of those hoping for a 2014 interest rate rise – however, given the recent stream of positive UK data releases, the result was quickly forgotten and probably written off as an anomaly.  GBP/USD quickly retraced the losses to get above the 1.71 level.

By Alex Edwards at UKForex, an international money transfer service

The FOMC meeting minutes on Wednesday evening failed to lift the dollar, despite some expectations in the run-up to the announcement for the Fed to strike a more hawkish tone.  They said that they expected QE to end in October, but there was no talk of them lifting interest rates.  The USD fell away again and GBP/USD remained well supported above 1.7100, heading in to the end of the week.

Later in the week, risk sentiment took a turn for the worse after share-trading in Espirito Santo, one of Portugal’s biggest banks, was suspended.  Its share price fell by 17% because of “ongoing material difficulties” within the group.  Moreover, the concerns over accounting irregularities at its parent company, which started last year, have deepened.

The sell-off dragged the Portuguese index lower and the risk-off nature of trading spread throughout European and US markets.  The IBEX fell by 2.7% and the Cac and Dax fell by 1.8% respectively.  The dollar firmed up on safe-haven demand as a result, but GBP/USD continued to find good support at the 1.71 figure, only falling to a low of 1.7106 on the news.  As the euro dropped in line with European equity marketson Thursday, GBP/EUR made solid gains and traded to a high of 1.2602.

When it comes to data, things are set to get going a bit more next week, especially early in the week, with UK inflation data due for release on Tuesday and a speech by Bank of England Governor Carney 30 minutes later.  UK employment data then falls due on Wednesday.  On Monday, ECB President Draghi is speaking, and, in terms of data, the main event in Europe will be German ZEW.  From the US, we have retail sales, producer price data and the Philly Fed Manufacturing Index, whilst Fed Chair Yellen is due to testify before the House Financial Services Committee. Markets will be hoping stronger signs of when the Fed intend to raise interest rates, although the chances are thin, given there was no mention of this in the FOMC minutes this week.

Further reading: Toxic geopolitical cocktail could rekindle gold rally

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Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

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