Moneycorp update EUR & USD
The Euro remained little changed from the end of last week as currency markets consolidated their position ahead of the US presidential election on the 8th November. There seems little chance of any change in stance from the Central Banks prior to this date. Market volatility was much reduced this week from previous recent levels.
The single currency has been under pressure recently as investors appear to have come to the conclusion European Central Bank President Mario Draghi will extend monetary stimulus in December, just as the Federal Reserve raises interest rates. The ECB continue to ‘kick the can’ further down the road as any immediate tapering of its QE program is thought to be very unlikely.
The Euro has, however, maintained recent strength against the Pound. Comments from British Chancellor Philip Hammond on the potential for further GBP monetary stimulus providing no respite for sterling. The UK Chancellor said that he was willing to authorise further quantitative easing from the Bank of England (BoE) should they feel it was necessary.
The pound did manage to gain territory versus the Euro on Thursday morning following stronger than forecast UK GDP data. This bounce, however, was short lived as the pound returned to previous levels within a few hours of the release. According to the latest IFO report, German business sentiment rose to the highest level in more than two years in October, signaling renewed growth momentum in Europe’s largest economy.
We are a week away from the Federal Reserve’s November policy meeting, but it appears very unlikely we’ll see any significant change in Central Bank monetary policy. There are two reasons for this. Firstly, with US Presidential elections less than a week later (Fed meets on November 2; US elections on November 8), policymakers may choose not to influence the markets and risk increased volatility. Secondly, the Fed rarely acts without ‘justification’ and the next summary of economic projections will not be released until December.
Markets appear dismissive of a November surprise and are pricing in only a 17% chance of a rate hike next week. The market however are pricing in a 73% chance of a rise at the 12 December meeting. The US Dollar has eased from recent highs against a basket of major currencies after touching a near nine-month high on Tuesday as the greenback looked vulnerable to uncertainty surrounding Federal Reserve monetary policy and the U.S. election.
Elsewhere, orders for U.S. business equipment fell in September by the most for seven months, indicating corporate investment is having trouble gaining traction. Business investment remained slow in the third quarter as moderating demand and weakness overseas appears to have prompted companies to hold back. In addition the Conference Board’s US Consumer Confidence Index for October showed a decline from previous reading of 103.5 to 98.6, missing expectations of 101.5.