Markets await for an ECB interest rate decision this Thursday
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Daily Currency Update
A politically paralysed France has had four prime ministers' in the past 20 months and appears on the verge of having a fifth, a degree of instability suggestive of an institutional crisis and unknown since the establishment of the fifth republic in 1958. Prime minister Mr. Bayrou, has called for a confidence vote later today and markets will closely watch for the outcome and its effect on the single currency.The pound is largely unchanged today having posted its biggest one day rally after a much weaker than expected employment report out of the US. Inflation in the UK remains well above the BoE's 2% target and the economy is slowing which is creating a perfect storm for the Monetary Policy Council. The UK are expected to lower borrowing costs by just 25 basis points before year end.
After a weak employment number last Friday, the question is whether the US job market is shifting from cooling to deteriorating and has markets questioning if the Federal Reserve should cut rates faster than originally thought. The Dollar hit a six week low vs a basket of currencies last week with US Treasury yields also dropping sharply.
Key Movers
The European Central Bank meets this Thursday and are widely expected to leave interest rates unchanged for the second straight meeting. A hawkish tone from ECB President Lagarde dented market expectations for further rate cuts and when one considers a trade deal between the EU and the US and an economy that is not contracting, Frankfurt have little reason to lower borrowing costs at this time.British Government Bonds, known as Gilts, sunk amid a broader market sell-off as focus shifts toward rising debt levels in major economies. Gilts shot to their highest level since 1998 last week as markets brace themselves for the upcoming UK budget on November 26th. The UK Government must adhere to fiscal discipline if they are to keep the bond market onside prior to the budget.
For the past 15 years global investors have considered the Dollar a natural hedge during economic and political shocks, allowing them to feel more comfortable while increasing their exposure to US assets with no hedge in place. Put simply if US markets tanked the countervailing surge in the US Dollar would limit investors losses, however this year that changed for the first time. The S&P index fell 20% in April while the Dollar also dropped by 8%.
Expected Ranges
- GBP/USD: 1.2485 - 1.2535 ▼
- GBP/EUR: 1.1505 - 1.1555 ▼
- GBP/AUD: 2.0500 - 2.0550 ▼
- EUR/USD: 1.1695 - 1.1745 ▼