ECB rate cut and further QE likely on Thursday

Today's Highlights

• EUR-USD at 7 month low

• ECB rate cut and further QE likely on Thursday

• US employment report and Ism may set tone for Federal Reserve

FX Market Overview

Andy Murray is not just Scottish but British with a capital B today after he led the GB team to victory in the Davis Cup for the first time since 1936. That was the year Jesse Owens humbled the Nazis, the year the Zeppelin Hindenburg was launched and the year Edward VIII was crowned King of England. Fred Perry was the headline act in 1936 tennis. I wonder if we will be wearing Andy Murray polo shirts 80 years from now.

The Australian Dollar has started the week in good form after company operating profits rose significantly last month. Whilst the profits rise was significant, the Aussie Dollar only gained about 1% against the Pound. Traders are nervous as we start a week in which the Reserve Bank of Australia is unlikely to change policy but could change their rhetoric. However, there is still scope for them to surprise the markets by easing the base rate to a lower level but that is an outside bet.

The week will also bring Purchasing Managers Indices from the UK, US and EU as well as interest rate decisions from the Bank of Canada and the European Central Bank. We are likely to see the scene being set for the first US interest rate hike with news events like the factory orders data, the release of the Fed's Beige Book and Friday's very important employment report.

As far as the ECB is concerned, many in the markets are expecting a more negative deposit rate (the ECB charging greater interest to hold bank funds on deposit) as well as further monetary expansion through looser QE measures. The euro is suffering as a result.

We are also likely to see further evidence of a slowing Chinese economy and that would have repercussions for the Australian Dollars as well as the Canadian Dollar and South African Rand.

When all of these factors are taken into account, the weakness in the Euro is apparent; especially against the US Dollar. The Euro-USD rate is back down to levels last seen in April and could even test $1.0450; the all-time low. The anticipation of higher US interest rates is also pressing the GBP-USD rate back to the $1.50 level. Psychologically, this is significant and a break below here could well point to more significant losses.

And I will just mention; because it made me laugh, that I was the question master on Saturday evening, at a quiz night we organised for my wife's charity, Wildlife A&E. One of the science and nature questions was, ' Which is the largest species of lizard still in existence?' and I had barely finished the last syllable before someone blurted out, "Jeremy Corbyn." I can't help wondering if we had a member of the shadow cabinet in one of the teams.

Currency - GBP/New Zealand Dollar

It has been a relatively quiet week in terms of data releases from the UK and NZ this week. Sterling has struggled to maintain the gains of last week and has come under pressure once more. This has largely been due to weaker than expected data from the UK (namely retail sales) and shifting UK interest rate expectations. The Bank of England re-iterated the sentiment of the Inflation report at the Inflation Report Hearing earlier this week. With some members of the Monetary Policy Committee (MPC), actually suggesting the next move in UK interest rates will be lower.

From a technical stand point, we are currently trading below the long term trend line (green diagonal line on the chart) which has been in place since April. This is a concern and we need to see where we close the week as a close below this trend line (currently 2.30 or so) would be significant. If this trend line support is broken, then it would suggest that the corrective phase that we have been in has further to run and the trend is changing. The recent highs of 2.36 would be a target if the current move proves to be false break of the long term trend.

Currency - GBP/Canadian Dollar

The Canadian Dollar has been relatively volatile again this week amid continued fears of the global price of oil, although picked up on Tuesday as Saudi Arabia pledged to help to stabilise the price of oil. CAD has also strengthened a little on the back of USD strength, as a rate hike from the FED is almost a formality. GBPCAD started the week around 2.03 and following the upbeat news on oil and from the US, has currently dropped to just above 2.0050.

On the data front, it has been an exceptionally quiet week for Canada with no economic releases of note. That changes next week, as the BoC release GDP data as well as an interest rate decision and statement on Wednesday.

Currency - GBP/Australian Dollar

After topping out in August GBPAUD has been trading in a down channel with lower highs and lower lows. Currently support comes in at 2.0750 level but the price may continue to fall to test uptrend support (T3 and T1) so downside targets are 2.05 and onto 2.0250. On topside, target 2.10-2.12 on a bounce. Next week’s RBA interest rate meeting on Tuesday is not expected to have any surprises, whilst analysts are split 50:50 as to whether the next RBA interest rate move will be up or down, I don’t think any change is expected as early as next week. Keep an eye out for the ECB’s interest rate meeting on Thursday, they’ve signalled further interest rate cut is likely, which would lead to a rally in stocks and commodities and boost risk-on currencies like the Aussie, so GBPAUD may well struggle through next week, particularly if the RBA are upbeat in their statement.

Currency - GBP/Euro

Sterling Euro has consolidated for the most part of the week despite breaking the steep uptrend. The currency pair was buoyed after George Osborne increased the government’s forecast for UK growth next year and reports of an unnamed ECB member who suggested that ECB policy makers were thinking about widening the scope of their bond buying program or implementing a two-tier penalty charge on banks that leave cash with the central bank.

Sterling Euro is likely to continue to consolidate as we draw closer to the ECB decision next Thursday. The market has almost fully priced in more accommodative measures, so if the market left disappointed with the measure we could see an aggressive correction lower. Particularly as the UK has entered its second month of deflation and as more dovish remarks emerge from the Bank of England - which are shifting the market expectations of when we will see an initial rate rise. With the exchange rate so close to the recent highs it may be prudent for Euro buyers to reduce any near term exposure close to current levels.

Currency - GBP/US Dollar

The sterling dollar exchange rate has remained largely range bound this week despite the bullish comments emanating from the Chancellor during his budget statement. The report was probably neutral on balance although he did confirm that UK plc was in fairly good shape. Of more importance in the short term will be interest rate expectations from the Federal reserve and the Bank of England. Noises emanating from over the pond would suggest that an increase in the fed funds rate is imminent and that should help keep the dollar supported. The Pound is currently trading just above psychological support of 1.5000 and it would not be a surprise if this is tested in the near future.