Sterling may struggle to maintain gains in the short term

This Week's Highlights

Australian dollar strong ahead of unemployment data

US retail sales and CPI awaited

UK unemployment and retail sales driving the Pound

FX Market Overview

Yesterday the Bank of England unsurprisingly left interest rates on hold as they voted 8-1 to leave policy unchanged. The only dissenter was Ian McCafferty who asserted that a likely rise in inflation justifies an immediate increase in interest rates. The committee acknowledged the slowdown in China and increased geo political tensions however they were not overly concerned and overall they expect the pick-up in inflation to rise only gradually. It is now apparent that rates will remain lower for longer and interest rate markets are beginning to price that in, with most not expecting a UK rate rise until well into the second half of next year. Sterling may struggle to maintain gains in the short term.

Overnight the US Federal Reserve's rate setting committee, the FOMC released the minutes from their last meeting and they pretty much echoed the dovish tone that was apparent in the Statement immediately following the meeting on September 17th. The price action would suggest that markets were anticipating a more hawkish message particularly after the recent comments from Fed members. The minutes focussed on concerns about low inflation due to dollar strength and global risks. The dollar has struggled to make gains after last week's poor non-farm payroll number and in a day devoid of meaningful data that trend is likely to continue. Commodity currencies have been the main beneficiary as risk is being put 'back on the table', as the markets would say. i.e. investors are happier to take risks than they were yesterday.

As mentioned the data calendar for today was pretty sparse with only the UK trade balance this morning and Canadian unemployment data this afternoon. A rise in car shipments helped the UK trade deficit to narrow to just £3.3 billion in August; down from the £4.4 bn the month before. That did little more than help the Pound consolidate its position but more of that below.

The Canadian employment data was poor. The unemployment rate rose to 7.1%; the worst result in 18 months as jobs were shed in the education sector. The overall measure of employment did show more people in work but the number of people in the labour market skewed things.

In addition to these morsels, we will get to hear from a couple of Federal Reserve speakers that have not spoken since the jobs data was released last week. In light of the change in sentiment these will be scrutinised quite closely. Atlanta President Lockhart is due to talk at 13.00 and Chicago President Evans just after the UK close.

And as we head into the weekend, I have to say I was delighted to see the Harvard Debate Team's very generous praise for thee opponents who beat them. Those opponents were the debate team from Eastern New York Correctional Facility who had been coached by members of the faulty at Bard College. It is amazing what people can do when they turn their energies away from crime and into something positive. It's a fantastic story and I just hope it leads those inmates to something more constructive in their post-prison lives.

AUD
The Reserve Bank of Australia boosted the Aussie Dollar when they ruled out interest rate cuts and the delay in US interest rate hikes helped it to strengthen again. Hence the Sterling – Australian Dollar rate has dropped from nearly A$2.50 to around A$2.08 in the last 6 weeks. The correction in the value of the Pound helped of course but there is scope and maybe even probability that this pair may slip to the short term support at A$2.05 and, if that breaks, we could even see a dive to A$2.00 in the weeks ahead. The caveats are that this can only happen if we don't see significantly better UK retail and employment data next week and that we don't see a slump in Australian employment or consumer inflation either. As we know though, forecasts are regularly missed and anything could happen. If the Pound does manage to bounce against the AUD the top of the range is in the high A$2.40s and maybe A$2.52 if the momentum is strong.



CAD
Today's Canadian employment data showed a small rise in those in work but also a rise in the unemployment rate to 7.1%. That's an eighteen month high and it comes off the back of a fragile energy and raw material market plus some changes in the education sector. Nonetheless, the weakness in the Pound over the last week or so has allowed the Sterling – Canadian Dollar to fall from C$2.08 to C$1.98 in the last 6 weeks. Traders will be glued to the speech by Bank of Canada's Governor Poloz on Monday to see if he has any answers to Canada's export malaise. However, from a technical perspective, there is no reason why this pair can't fall to C$1.96where it will find support at a level which previously capped this pair. If UK data is more encouraging next week, a rebound in this exchange rate could take it to C$2.09 without breaking out of the 3 year long upward trend but it will find resistance at the psychological barrier of C$2.00.



EUR
The Sterling – Euro exchange rate has the ominous demeanour of a calm before a storm. The fall in German industrial output is a warning shot across traders' bows. German industrial strength has been the rare shining light in the gloom of the Eurozone, so if it is in decline, driven by the fall in Asian demand, ahead of the melee that will happen as the VW scandal starts to impact demand for German cars, who knows where that may end. Other than inflation data and a smattering of confidence indices (which have been pessimism indices of late) the Eurozone data diary isn't exactly overflowing for next week. Anything positive on the Sterling side of this equation is likely to give the Pound a spring in its step.



USD
The US Dollar had a mixed week and is set to have an even mixed-er-er one next week. Monday is Columbus day holiday, so the rest of the week is crammed with important data releases. The Sterling – US Dollar rate is establishing a range of $1.58 at the top to $1.51 at the bottom and for now, that $1.51 level has proven to be a very strong lure to GBP buyers. Hence the bounce from that level in 5 of the last 6 weeks. Next week's retail sales and consumer inflation data push the focus back to the consumer side of the US economy and that is by far the largest sector. We also get a barrage of speeches form members of the Federal reserve and that will also be followed with interest. As with other GBP related pairs, the UK economic data will play a part and there is scope for the Pound to increase in value as long as the UK data is as solid as the forecasters are hoping. Stand by for volatility.