Euro weakens on ECB inaction

This Week's Highlights

Sterling slips amidst lack of data

Euro weakens on ECB inaction

US employment data boosts USD

FX Market Overview

Recent Eurozone data has been limp and this morning's PMI data from various states has been in similar form. Yesterday's European Central Bank meting didn't help things at all. The markets were quite disappointed by Mario Draghi's reticence over the timing and volume of the ECB's extraordinary measures to stimulate growth in the Eurozone. He had previously suggested the ECB would expand its balance sheet by up to a Trillion Euros but appears to be back tracking on that. A central banker being ambiguous? Perish the thought.

Nevertheless, that is keeping the euro weak but, just to confuse the matter, the Euro gained against the falling Pound yesterday and gained again after positive EU retail sales figures this morning. A lack of UK data left the Pound room to correct some of its recent gains. As far as the UK is concerned we were similarly devoid of data today other than the UK service sector PMI which hit a 3 month low. Sterling ought to have been lifted by comments from a number of major institutions which forecast the BOE will raise interest rates before the Federal Reserve does but the general perception is that UK rates will rise more steadily than those in the US. Ongoing political unrest in Hong Kong has caused further weakness in Asian shares overnight and weakened the Asian currencies as well.

The US Dollar has picked up most of that slack and we were seeing USD strength as we approached this afternoon's release of the US employment report. Yesterday's weekly jobless claims data was definitely upbeat so the anticipation was for a positive result in the non-farm payroll count and the Data didn't disappoint. Nearly a quarter of a million jobs were created in September and the jobless rate fell to a 6 year low at 5.9%. If that doesn't hasten the Fed's interest rate plans, who knows what will.

Oh and have you noticed how cheap petrol and diesel are at the pumps lately? No neither have I but Saudi Arabia has signalled that they may get involved in a price war and have already cut the cost of crude oil to 2008 levels. I am no expert on the oil market but I hear that prices are nearing levels at which it would be unprofitable for some US producers to continue refining crude. Just so you know, in 2008 UK pump prices for petrol were around £1.05 a litre; today they are around £1.30. Confused? Yes, so am I.

Currency - GBP/Australian Dollar

Having peaked at the end of last week, Sterling has declined during this week as traders took profit, the UK data softened and Australian data suggested the Aussie economy is troubling the Reserve Bank enough to suggest monetary tightening may be on the cards. You can see that correction in the chart above and you can also see the support the Pound has encountered at 1.83 and will find if it ever drops to 1.8125. This chart is a couple of hours out of data and the spike in the value of the US Dollar has caused some weakness in the Aussie and Kiwi Dollars. Hence the Pound is back up in the $1.84 area as I write. The key for the Sterling – Australian Dollar exchange rate in the short to medium term is whether this pair can trade above A$1.84 again. If it can, then another substantial rally is on the cards. If not, another drop to these support levels will ensue.

Currency - GBP/Canadian Dollar

After its slump against the Canadian Dollar in the first half of September, the Pound has managed to regain at least half of its lost ground in the last two weeks. This pair is currently hovering around the C$1.80 level; dipping and spiking within a cent or so. Data-wise, the UK data is mixed and Sterling is relatively strong but the Canadian Dollar is being dragged along by the resurgent US Dollar. To a large degree, that is what is keeping the GBPCAD exchange rate subdued. C$1.80 appears to be pivotal; a break below there opens up another dive to C$1.75 and a push above here offers us a chance of a rally to C$1.84 again. So we sit mid-range and have the chance of risk and reward in equal measure.

Currency - GBP/Euro

I continue to look at the long term chart for the Sterling – Euro exchange rate and I am now starting to dare to think that the Pound has broken the downward trend and is preparing itself for a substantial rally. I note many of the high street banks and institutions are also starting to forecast higher Sterling – Euro exchange rate. Essentially, as long as the Pound stays above €1.26, we can see further gains and that could take us as high as €1.3026 and maybe even €1.39 in the medium term. A break back below €1.25 kills that optimism and starts to bring €1.1750 into focus.

Currency - GBP/New Zealand Dollar

The Sterling – NZ Dollar rate has been trending higher over the year but last week's spike was enough to test the same high that stopped this pair in its tracks back in May 2012. Well done to those who managed to trigger orders there. The most interesting part of that move is the fact that the Pound immediately corrected back into the range of the year. What next? Well I suspect we will see a continuation of this correction; a move taking this pair down to NZ$2.01 or maybe a tad lower. That will be the crucial point. If Sterling slips below there, the obvious target is NZ$ 1.94

Currency - GBP/US Dollar

The US Dollar is gaining ground after strong employment data even though the data for the rest of this week has been rather lacklustre. It seems inevitable that we will dip below $1.60 but we ought to see a bounce from there when traders realise one set of positive labour market data does not a summer make (poor Shakespearian misquote I know but never mind). If Sterling doesn't manage to bounce, then the downward trajectory will see us hit $1.57 in a month or so.