Currency View by OFX

Last week’s news

• The UK has struck its first big post-Brexit trade deal with Japan after reaching an historic agreement expected to increase trade by around £15bn a year. The deal comes at a crucial moment for the UK Government as it negotiates with the EU over several disputes that neither side is willing to budge on. Similar trade talks with Trump and the US administration have stalled. The UK-Japan trade deal is expected to boost UK GDP by 0.07% whereas it is forecast that leaving the EU customs union would reduce UK GDP by 5%.
• The Euro moved higher mid last week, after the ECB reported more confidence in their regional economic recovery forecasts. The currency spiked above 1.19 again but lost close to 1% the next session on broader USD strength. Despite the volatility, and in similar fashion to other major currencies like the AUD, it was able to close the week above the 1.18 psychological barrier against the USD.
• Brussels have threatened legal action over the UK Brexit Treaty breach and issued Boris Johnson with an ultimatum to scrap his plans to override the UK’s Brexit treaty by the end of the month, warning the move had ‘seriously damaged trust between the EU and the UK’. The EU wish for the UK to withdraw controversial clauses within the UK’s internal market bill which allow the UK to ignore parts of the Brexit agreement dealing with Northern Ireland. The EU have accused the bill of breaking international law as if the bill passes, the protocol solved the long-running stalemate between the two sides by keeping Northern Ireland close to the EU customs union at the same time as being in the UK’s customs territory, creating ‘an overlap’.
• Equities closed the week around 2.5% weaker, with special focus being placed on tech companies in the US (Nasdaq Index). The USD recovered some ground as risk settled back slightly while volatility seems to be picking up in both the FX and equity space, which could be a heads up of what is to come with US elections. US inflation data came higher than expected, also adding to USD demand.

Looking ahead

• Currency wars are back! Christine Lagarde, the head of the ECB approved the strength of the EUR, saying policymakers ‘will carefully assess incoming information, including developments in the exchange rate’. She added that the stronger single currency was ‘discussed extensively’ during deliberations within the ECB. It is the first time that the ECB has referenced the exchange rate in its policy statement since 2018 as many believe that the ECB is happy with its current weak status and does not want any further appreciation of the euro which could make it too expensive for outside investment. The ECB has already done pretty much everything in its powers to weaken the EUR with negative interest rates and huge quantitative easing programmes, so they may look for other ways to keep its single currency low.
• Keep an eye on risk this week, plenty of reasons for potential volatility ahead. We get RBA minutes and Australia employment data, plus Central bank meetings for the US, UK and Japan. To add up, FX volatility, driven by recent GBP action, has been on the rise and to close the week, we have expirations of futures and options occurring on the same day, generally a sign of increase in trading activity and volatility.

Key market events this week

• AUD RBA Minutes – Tuesday
• GBP Employment Change (Jun)- Tuesday
• EUR ZEW Economic Sentiment Index (Sept)- Tuesday
• GBP Core Inflation Rate YoY (Aug)- Wednesday
• CAD Core Inflation Rate YoY (Aug)- Wednesday
• USD Retail Sales MoM (Aug)- Wednesday
• FOMC Interest Rate Decision and Economic Projections- Wednesday
• NZD GDP Growth Rate YoY (Q2)- Thursday
• AUD Unemployment Rate and Employment Change (Aug)- Thursday
• BOJ Interest Rate Decision- Thursday
• EUR Core Inflation Rate YoY (Aug)- Thursday
• BoE Interest Rate Decision- Thursday
• JPY Inflation Rate YoY (Aug)- Thursday
• USD University of Michigan Consumer Sentiment and Index (Sept)- Friday