Firm US retail sales data and an underlying lack of confidence in other major currencies were important factors supporting the US dollar on Friday, especially with underlying fears over trade tensions. Sterling was sapped by on-going political uncertainty while fears over low inflation continued to undermine the Euro. Positioning ahead of Wednesday’s US interest rate decision will be important with markets also monitoring Iran developments and trends in oil prices.
Pound Sterling (GBP)
Sterling was unable to make headway on Friday with investors unable to find supportive factors. Political uncertainty remained high with markets still concerned over the risks of a ‘no-deal’ Brexit given Conservative Party leadership frontrunner Johnson continued to insist that there must be a UK withdrawal on October 31st. From a wider perspective, there were persistent fears that uncertainty would damage the economy. Overall, GBP/USD declined to lows below 1.2600 as GBP/EUR also failed to take advantage of Euro weakness. Central bank decisions will be crucial this week given US and UK meetings with near-term caution.
The Euro came under further selling pressure on Friday as underlying sentiment remained negative. The principal focus was again low inflation and increased concerns that low-inflation expectations would become entrenched. In this environment, there were also increased expectations that the ECB would cut interest rates again. German bond yields dipped to fresh record lows and EUR/USD declined sharply to 8-day lows in the 1.1200 area. There was little change on Monday as underlying Euro sentiment remained negative and markets will remain focused on ECB rhetoric in the short term.
US retail sales data was stronger than expected which underpinned confidence in the US economic outlook. Although markets still expected the Federal Reserve to cut interest rates during 2019, confidence in a move this week declined which supported the US dollar. The currency also gained important support from a lack of confidence in other major currencies while underlying US-China trade concerns persisted. USD/JPY strengthened slightly to just above 108.50 as US yields edged higher while the Australian dollar dipped to 5-month lows. Near-term activity is liable to be muted ahead of Wednesday’s interest rate decision.
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