3 exchange rate moving developments to watch out for this week
If investors were hoping for calm trading conditions in the previous week, they were heartily disappointed. The five-day session kicked off with ‘Black Monday’ – a bleak sounding name for an unusually volatile day – and the rest of the week saw stock, commodity and currency markets desperately trying to recover an even footing.
Concerns relating to a slowdown in China have been growing in recent weeks and a less-than-impressive manufacturing report for the Asian nation tipped the situation over the edge and led to the most dramatic crash in the Chinese stock market in recent memory.
As Chinese stocks dropped so did those in the US and Europe, with the result that the euro spiked in response to unwinding carry trades, commodity currencies plummeted and the US dollar came under pressure as a result of pared back Federal Reserve interest rate hike expectations.
Over the next few days, market conditions calmed and the currency market started to correct itself. Sterling moved away from its fresh multi-year highs against peers like the Australian dollar and Canadian dollar while the euro’s upward momentum dwindled and the US dollar benefitted from upbeat US data.
The pound/euro exchange rate closed out last week in the region of 1.40 but has now fallen to 1.36 while the GBP/USD exchange rate has weakened from 1.56 to 1.54.
So, what should we be looking out for in the coming week?
GBP exchange rate volatility expected on PMIs
The long term effects of ‘Black Monday’ could be far reaching and the event has already led to investors pushing back their Bank of England (BoE) interest rate hike expectations from the first quarter of 2016 to the third – a contributing factor to the pound’s weakness at the end of the week.
However, if upcoming UK data increases the pressure on the central bank to adjust borrowing costs sooner-rather-than-later, the sterling could recover ground.
Of the British publications scheduled for release over the week ahead, the most influential are likely to be the nation’s manufacturing, services and construction PMIs. The gauges for the UK’s main sectors were mixed in July so investors will be hoping for evidence of sturdy growth in August. A rebound in manufacturing or uptick in services output would be particularly well received and could see sterling advance on peers like the euro and US dollar over the course of the week.
Exchange rates can be extremely volatile. Look into registering for regular market updates if you want to stay up-to-date with the latest market movements.
ECB easing comments could see EUR exchange rate reverse gains
While the Eurozone’s inflation numbers will be a major source of euro volatility this week, particularly if consumer price pressures fall, investors with an interest in the common currency will be focusing on the European Central Bank’s (ECB) interest rate announcement.
Given the recent Chinese volatility, it’s possible that the ECB will hint at the possibility of easing being increased or extended in order to up the odds of inflation returning to target levels.
If such hints are offered during ECB President Mario Draghi’s press conference, the euro is likely to tumble.
USD conversion rate outlook reliant on US non-farm payrolls
Although ‘Black Friday’ did appear to put the kibosh on a September interest rate hike from the Federal Reserve, the US dollar got its mojo back after US durable goods orders and second quarter growth data wildly exceeded expectations.
With the US economy being shown to have expanded by 3.7 percent on an annualised basis in the three months through June, up from an initial estimate of 2.3 percent, a rate increase taking place before the end of the year still looks likely.
A strong non-farm payrolls report on 4 September would only serve to bolster these hopes and keep the US dollar on an upward trajectory. However, a disappointing jobs increase or average earnings figure would have the reverse effect on the Greenback’s appeal.
Exchange rate movements can be swift and dramatic, so if you’ve got a currency requirement coming up and want to move your funds at the right time, you may want to have a chat with a currency specialist.
Contributed by TorFX
TorFX is a specialist currency broker that offers far better exchange rates than you are likely to receive from a high street bank.