Markets volatile ahead of Central Bank meetings on Thursday

Sterling saw some surprise gains at the end of last week, which it mostly managed to retain yesterday despite poor discernible data being released in the form of Manufacturing PMI. The currency jumped at the end of the trading day on Friday in what appeared to be a flow driven move, and although the gains retraced slightly when trading resumed yesterday, Sterling regained strength with the publication of mortgage approval data which came in above estimate. Today we have the release of the construction PMI, but investors are mainly eyeing the MPC asset purchase facility and rate decision on Thursday. The publication of the BoE minutes from the latest meeting indicated that two members out of nine actually voted to increase interest rates in the UK by 25 basis points last month. Sterling gains since the surprise minutes have so far been muted, as the August meeting took place before both wage inflation and CPI inflation data surprised to the downside, but having said this Sterling is likely to be highly volatile up until and during the meeting on Thursday whereby rumours of an interest Rate rise this year may finally be put to bed.

The Euro continued to lose ground yesterday following its disastrous performance last week whereby the single currency fell to the lowest point in almost a year versus the US Dollar. This is despite most other major currencies (including Sterling) witnessing a fleeting rally against the greenback and truly signifies the dire strait the Euro is navigating. Although no top tier data was released yesterday, we did witness the Spanish and Italian Manufacturing PMI’s drop below analyst consensus, with the latter actually dropping into negative territory at 49.8, to the detriment of the Euro. Fundamentally the Euro is heading lower thanks in large part to expectation that the ECB is to imminently announce plans to increase easing measures for the 18-nation currency at its policy meeting on Thursday. ECB president Mario Draghi recently alluded 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 his statement 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.

Yesterday was a bank holiday across the pond, but we expect the US Dollar gains to continue today as the market continues to digest the increased likelihood of an interest rate hike from the Federal Reserve in the near-term. Recent Dollar strength is stemming from the constant stream of positive fundamental economic data being release stateside which has led to a hawkish sentiment from the FED. With US economic data supporting the optimistic outlook for US economic growth and an early rate hike we should continue to see the greenback on the offensive. Indeed, the minutes of the latest Federal Reserve policy meeting demonstrated that Federal Reserve members are considering raising interest rates earlier than anticipated. This factor coupled with ongoing risk averse market sentiment owing to the tense geopolitical climate is likely to benefit the US Dollar for the foreseeable future.