Sterling gains short-lived

Sterling saw some surprise gains last week following the publication of the BoE minutes from the latest meeting which indicated that 2 members out of nine actually voted to increase interest rates in the UK by 25 basis points this month. Sterling gains were limited however as since the August meeting took place both wage inflation and CPI inflation data releases have been weaker than anticipated. The BoE has made it widely known that an interest rate rise will be dependent on a number of key economic factors - namely sustainable economic growth, low unemployment and on target inflation. Employment and inflation are still below target and the view remains that the BoE will not raise rates until May 2015 the earliest. This week is very quiet on the data front in the UK, we can expect Sterling movements to be dictated by speculation, surprise announcements and data elsewhere.

The Euro was heading lower last week thanks in large part to increased speculation and expectation that the European Central Bank will imminently announce plans to increase easing measures for the 18-nation currency. Toward the end of last week ECB President Mario Draghi heavily eluded to the fact that the central bank is preparing to implement tools that it has at its disposal to boost the Eurozone economy. This coupled with Draghi’s statement at the start of this month that he was seeking ECB approval for further quantitative easing in the immediate future is leading market spectators to speculate that further asset purchases will be announced shortly. A quiet week beckons this week, although market-moving data is released in the form of the CPI Flash Estimate y/y, which is an early estimate of inflation and could be hugely influential because of the fact that the Eurozone is still under the threat of deflation and could sway the QE vote.

Last week proved very positive indeed for the US Dollar, which has seen sustained gains against most major currency pairs recently and reached a yearly high against the Euro. The movement seems to stem from hawkish sentiment from the Federal Reserve. The minutes of the latest Federal Reserve policy meeting demonstrated that Federal Reserve members are considering raising interest rates earlier than anticipated. Economic data stateside is supporting the optimistic outlook for US economic growth and an early rate hike. The other major event last week, the Jackson Hole Symposium, was also very positive for the US Dollar. Janet Yellen remarked that more jobs have now been created in the recovery than were lost in the downturn, with payroll employment in May of this year finally exceeding the previous peak in January 2008. This week we see a plethora of important data released across the pond, with Prelim GDP q/q and Unemployment Claims likely to impact the market and drive further US Dollar gains if positive.