According to many analysts, the end of August marked a turning point for the Pound- with the first 2 quarters of this year pretty much fuelled by Sterling strength, it seems that is now changing with the U.S Dollar now catching a bid again across the board. The reason for this is that the UK economy is not performing well at all, and we are now also seeing a slowdown in the UK housing market, which is usually a strong signal that an economy is weak- with higher interest rates across the board, a pretty steep correction is needed to balance things out again, so far we have seen 5% which is pretty big, it will be interesting to see how this plays out especially if the BoE is to continue raising rates in the UK.
Banks such as HSBC and Barclays are both forecasting a pretty dull 12 months ahead for Sterling, with 1.16 predicted by next year against the Dollar- if we do see a heavy recession then I do see how this could be possible- the only counter-argument is that it is an election year both in the UK and in America so I am pretty confident that the data releases will begin to show positive glimpses. But for the here and now, I do agree that GBPUSD will stay in this 1.24/1.25 region for now, and the GBPEUR should remain pretty stable around 1.15-1.16. Much of this will now be data driven so as we see new releases across these economies we will be able to forecast a lot more accurately- given the news in China last week the U.S Dollar saw a lot of strength as the market grew more risk off as the week went on.
This week we do have a few notable data releases- which will be heavily watched due to the Central Bank announcements later this month- the first is UK employment figures on Tuesday, we are expecting to see Unemployment go up in the UK for July, and average earnings are expected to remain stable as expected. Later we have ZEW economic sentiment index for the EUR which is expected to come out weaker- so I do expect to see a weaker Euro on Tuesday.
On Wednesday we have a busy morning of UK releases with GDP, Balance of Trade, Industrial and Manufacturing production data- we are expecting a contraction in production, so this could put some weakness into the Pound on Wednesday’s session unless we get any positive surprises from GDP and trade balance. Later on Wednesday we have Inflation data out of the US where we are expecting CPI to come out lower which should strengthen the U.S Dollar.
On Thursday the key event is the ECB’s interest rate decision- where the market is expecting rates to stay unchanged at 4.25%- any change from these expectations will move the market- recently EUR data has shown the economy would not be able to support another rate hike so I do not expect the ECB to go against the grain here, especially since most Central Banks are holding rates currently.