Awaiting ECB interest rates and US NFP

This week has the potential be busy with the latest European Central Bank (ECB) interest rate decision and final US Non-Farm Payroll before the Federal Reserve conclude Quantitative Easing both scheduled. Already we have seen an increase in market volatility following the unexpected political unrest in Hong Kong and UK Prime Minister David Cameron winning support from UK Parliament late on Friday to join the international coalition against the Islamic State.

The unexpected pro-democracy protests in Hong Kong have already weighed on the HKD but further losses could still be to come. If there are additional signs of corporations pausing operations in Hong Kong while the protests continue, we can expect a further decline in Hong Kong stocks. Although the protests have not yet encouraged investors to seek a safe-haven currency, if the protests continue for a prolonged period investors in Asia might seek the JPY. This would pause the USDJPY upside rally, where potential support can be found at 109.053 and 108.666.

The GBPUSD has also pulled back since the UK Parliament was called in to vote on action against the Islamic State, but I am not expecting any substantial losses in the GBP. When US President Barack Obama announced US airstrikes in Syria, the Greenback weakened but recovered losses shortly after. I am expecting a similar outcome for the GBP and currently expect that for either the GBP or USD to decline due to the Middle East conflict, it would require troops to be deployed to the region. With the exception of UK GDP, economic data is low from the UK this week. Instead, investors are patiently waiting for Westminster to define what extra political powers Scotland will now receive and this could dominate UK headlines throughout the week.

Bank of England (BoE) Governor Mark Carney reiterated only last Thursday that an interest rate hike “is getting closer” and a UK rate rise has not yet been priced into the GBPUSD. Once Westminster has made it clear what Scotland’s new powers will be, I am expecting investor appetite to return to the GBP for the remainder of 2014.

In Europe, not only is there an ECB interest rate decision this week, but a variety of EU inflation data is also released. There are hopes that a weaker EURUSD valuation will have a positive impact on inflation data, but last week’s EU PMIs failed to show this correlation and, if inflation figures continue to suggest the EU is plagued by dangerously low inflation levels, I expect the euro bears to wake again and investors to continue pricing in future stimulus from the ECB.

Although ECB President Mario Draghi hinted last week that he is prepared to act again if necessary, I am not expecting the ECB to act on consecutive occasions. Unless the inflation data is very worrying, it’s more likely Draghi will use his press conference to talk down the EU economy, and attempt to bring down the EURUSD valuation some more. Draghi is fully aware the US economic sentiment is improving and the divergence in monetary policy between the Fed and ECB is becoming clearer to investors. If Draghi wants a weaker EURUSD exchange rate, the press conference provides an opportunity. I am expecting the EURUSD to be trading at the low 1.25s by the time the Fed conclude QE in October.

Before the week concludes with the September US Non-Farm payroll data announcement, influential economic indicators from the United States including Consumer Confidence and ISM Manufacturing will also be revealed. Investors are going to be looking for further clues towards what momentum the US economy is bringing to Q3 and as long as data continues to suggest the US economy is displaying consistency, I will remain bullish on the Greenback until QE concludes. A stronger USD this week should provide the USDCHF with the right momentum to effectively surpass the 0.9518 resistance level where the upside rally seems to be pausing, while Gold still appears to be set to meet the 2013 lows ($1187) by the time QE concludes.