The pound was steady throughout the early part of the week, with investors fairly unresponsive to UK Chancellor George Osborne’s speech at the Conservative party conference. Sterling fell as the week went on, initially in response to dreadful UK current account figures. The deficit printed at £23.1 billion in the second quarter of 2014, up from £20.5 billion in Q1 and a lot bigger than the forecasted £16.9 billion.
There’s been a general feeling developing over the last few days that the Bank of England might not actually be set to hike interest rates early next year. It’s a feeling that has been underlined by weaker than expected prints in UK manufacturing and construction PMIs, as well as the huge current account deficit number. Dovish comments by the Bank of England’s Ben Broadbent and Kristin Forbes haven’t helped either. Broadbent told ITV that the UK wasn’t ready for a rate hike yet, whilst Forbes’ comments also weighed on the pound.
In the US, Non-Farm Payrolls printed a lot better than market forecasts. 248,000 private sector jobs were created in September vs. expectations for 216,000. The unemployment rate also dropped to 5.9% vs. expectations for 6.1% and markets are also pricing in a first Fed rate hike in July 2015. The dollar gapped higher as a result, and GBP/USD dropped below 1.60, the first time it’s traded at this level since November 2013. This most recent jobs data will likely continue weighing on the GBP/USD and EUR/USD during the early part of this week, now that both currency pairs have broken in to new ranges.
By Alex Edwards at UKForex, an international money transfer service
As for the eurozone, the main event of the week last week was the ECB monetary policy announcement, but even that was a bit of a non-event. The euro bounced initially following Mario Draghi’s news conference and the ECB’s announcement that it would be leaving monetary policy unchanged. It didn’t come as surprise to markets that he was dovish in his comments either – he referred to the medium term inflation outlook having worsened, but this was about as surprising as it got.
It was clear that the ECB remains committed to staving off the threat of deflation and supporting economic growth and will use “additional measures if needed”. Draghi announced that the scheme for buying covered bonds will start in mid-October and purchases of asset backed securities will begin before the year is out.
The bounce in EUR/USD proved only as temporary relief though as the US jobs data hit the wires, and there remains a real chance that the ECB will act on monetary policy again before the end of the calendar year. The EZ inflation outlook is unlikely to improve significantly either, and as the divergence increases between the ECB’s future policy direction and that of the Bank of England’s and the Fed, the euro looks set to lose more ground over the medium term.
The main event next week will be the FOMC Meeting Minutes and perhaps we’ll get more clues as to when to expect the first Fed rate hike. The Bank of England monetary policy announcement is also due, but it’s likely to be a non-event too, with rates and QE widely expected to remain on hold.
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