The Euro managed to stage a small recovery over the last five days in spite of the previous weeks reaffirmation from European Central bank Governor Mario Draghi that the Eurozone’s current woes did warrant further negative revisions to the regions GDP (Gross Domestic Product) forecasts. His willingness to yet again state his unwavering commitment to do whatever it takes to restore economic prosperity was interpreted as more QE (quantitative easing) measures being available.
Overall there was little in the way of major economic data to be shared over the week although global markets were preoccupied with how the Chinese stock market performance panned out for signs of risk on risk off driving worldwide investor sentiment. From China the data was unequivocally bad: exports shrank by an annual 5.5% in August, while imports were down by a whopping 13.8% leaving nations trading into China distinctly worried.
Yes there were so sizable swings in the stock markets but no new lows to be seen with some of the recent losses being clawed back. The calmer equity market environment has over the last 5 days helped curtail some of the wild price swing in the foreign exchange markets seen of late. Overall the single currency has gained 2 cents against the US dollar but remained contained within a tight range of $1.11 – $1.13, against the pound the Euro is looking to end the week not far from where it opened leaving it reasonably firm just above €1.3600.
Sterling was trading stronger against the Euro on Wednesday in spite of weakening economic data. The pound received a short term boost on merger and acquisition news, as the media reported news that Japan’s Mitsui Sumi was buying UK insurer Amlin for £2billion plus. Further M&A news with implications to FX pricing came in the form of Tesco’s exit from its foray into Korean retailing having agreed a £4billion sale to MBK Partners, a South Korean buyout firm. Both deals appear to have led to a firmer pound as possibly hedging cover was being conducted in the FX markets.
Of the data published we saw German industrial production rise 0.7% in July from a month earlier. There was also an upward revision to second quarter GDP from 0.3% to 0.4%, but not enough to warrant a massive boost to the single currency. German factory orders and industrial production were disappointing, as were French industrial output and Euroland investor confidence.
It was not all doom and gloom though from Europe as Italian industrial production continued its renaissance with its index up 1.1% on a month earlier. The Irish too had cause to congratulate themselves as its economy continues to steam ahead of its European partners with GDP for 2015 set to deliver 6% growth.
The weaker pound against the single currency cannot be a shock considering the data released was very much on the weaker side of expectations. The UK’s August British Retail Consortium Retail sales gauge rose just 0.1% versus a year ago. UKs manufacturers reported production levels declining by 0.8% in July from a month earlier.
Both would have been taken into account along with the benign inflation conditions in the UK by The Bank of England’s Monetary Policy Committee when they met this week to deliberate on interest rate conditions.
The MPC as expected refrained again from raising rates with the voting remaining the same 8 – 1 to leave as is, with Ian McCaffery still the only dissenter. The Bank also acknowledged the current weaker economic climate and shared its views that the 3rd quarter GDP growths are to be revised downwards from 0.7% to 0.6%.
Next week will be dominated by US Federal Reserve’s interest rate statement on Thursday evening. Whilst most analysts expect the Fed to keep its benchmark interest rate unchanged there is the possibility that it will announce the long-awaited increase. Either way, there is likely to be spirited – and unpredictable – currency action in the aftermath of the announcement.
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