The euro started the week with a slight advantage over the weakened US dollar following the previous Friday’s disappointing non-farm payrolls release which saw 142,000 jobs created during September versus an expectation of 200,000 plus. With downwards revisions to earlier month’s data, it was clear the US dollar would not have it all its own way, although the euro too was not going to be in for a smooth ride over the week.
Whilst there was a plethora of data released throughout the course of the week, it was again all about Central Banks policy, with the latest decisions and minutes to be shared on Thursday by the Bank of England, ECB and the US Federal Reserve.
Prior to the Central Bank updates we were treated to German industrial production which unexpectedly declined in August, with a clear indication that the slowdown in China and emerging market nations is taking a toll on Europe’s largest exporter.
The scandal still engulfing Volkswagen continues. The spiralling costs associated with the mass diesel car recalls, coupled with the possibility of fines doesn’t bode well for the German automobile industry. Job cuts are on the way and will impact many aspects of the European car industry.
With every sign of weakening EU economic conditions the market now seems to expect a greater propensity for the European Central Bank to expand its quantitative-easing program, which tends to weaken the euro.
UK economic data over the week was rather disappointing on the whole. The Halifax house price data saw a 0.9% month on month decline for September, although the more reliable 3 month period which helps smooth out any volatile spikes in the data did show a 2% increase on the previous 3 months.
A far more worrying data release came from the UK’s dominant services sector Purchasing Managers Index, which records activity levels. Any reading above 50 represents a growing sector; below and its contracting. The September release of 53.3 was a disappointment as the market had been hoping for an uplift. Whilst the sector is still growing this does represent the weakest level recorded since April 2013, and could suggest that the 3rd quarter GDP (Gross Domestic Product) may produce just 0.3% growth – less than half the growth delivered in previous quarters.
The pound was on the back foot prior to the MPC release and suffered the obligatory negative response once the Bank of England’s interest rate decision and 8-1 vote count was released. The minutes suggested that perhaps interest rates do not need to rise any time soon as wage inflation was not overly aggressive, encouraging traders to price any interest rate hikes even further into the future.
The euro gained ground against the US dollar on Thursday evening, following the release of the FOMC (Federal Open Market Committee) minutes covering the most recent interest rate decision meeting. The minutes offered a view of measured caution by the FED committee members, who will continue to monitor the emerging market conditions before adjusting its rates upwards.
The current global economic slowdown still holds sway over decision making in the US, in spite of improving labour conditions stateside, with an unemployment rate of just 5.1% that is considered as ‘full employment’.
The prudent stance shared by the FED members has prompted the market to reconsider expectations that interest rate lift off day will be postponed until early 2016 now.
The FEDS decision was well considered according to the IMF, as a deep slowdown in China and other emerging economies leaves the current recovery susceptible to risk.
Next week is rather light on data although we should gain more insight into the confidence levels of investors in the Eurozone, as we decipher the ZEW economic sentiment releases on Tuesday. Is the current cautious optimism warranted or are the negative headwinds gaining traction?
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