The single currency started the week on the back foot on Monday as market players positioned themselves in anticipation of Thursday’s important announcement from the European Central Bank.
Against sterling, the euro fell to the mid-1.42’s and lost significant ground to its US counterpart, dropping to fresh lows against the US dollar. The graph below shows GBP/EUR and GBP/USD movement over the last 24 hours.
Against a basket of currencies, the dollar rose to highs not seen since March this year. With the price of oil in freefall and the prospect of another interest rate cut from the ECB, investors are looking for safer bets in these uncertain times – the US dollar once again benefitting from its status as the world’s safe-haven currency of choice. Against the crippled euro, the US currency yesterday rose to trade in the mid 1.05’s, trading near the 10-year high hit earlier in the year.
As the Eurozone recovery grinds to a halt, it’s widely expected that the president of the European Central Bank, Mario Draghi, will announce further loosening of monetary policy on Thursday. There has been speculation that the central bank will cut the deposit rate further and may also announce an extension to the current quantitative easing programme; both measures designed to boost inflation and stimulate economic growth. Deposit rates are already negative in the Eurozone and the ECB are currently pumping €60billion into the flagging economy each month. An extension to the QE programme and a further cut in deposit rates will weigh heavily on the euro and we may well see a further weakening of the beleaguered currency.
As Europe struggles with low growth and the prospect of further interest rate cuts, the story couldn’t be more different across the Atlantic. The US Federal Reserve have apparently been on the verge of raising interest rates throughout 2015, but it now looks likely that we may actually see Yellen and Co. announce a rate hike this month. The forecasted divergence between monetary policy in the US and the Eurozone has forced EUR/USD down significantly, dropping to levels not seen in the last 10 years.
Although we saw no significant data releases of note yesterday, sterling managed to gain against both the US dollar and the euro, with traders looking ahead to Thursday’s central bank announcements. We’re likely to see similar movement today, with no significant ecostat releases. Having said that, the Reserve Bank of Australia announced early this morning that they would not be cutting interest rates this month, having already slashed the base rate twice this year. There had been speculation that the RBA would look to cut the cash rate as the slowdown in the Chinese economy dampened demand for Australian raw materials, notably iron ore. The Australian dollar has made modest gains as a result, despite a 3.5% dip in the price of iron ore over the last few days.
The RBA had cut rates twice earlier in the year as the economic situation in Australia deteriorated. Glenn Stevens, the governor of the Reserve Bank, would attempt to weaken the Aussie dollar at every opportunity, believing a weaker currency would boost exports and help stimulate economic growth. The RBA now seem to be content with the current strength of the local currency and the improving economic conditions:
“While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year,” the central bank said. “This has been accompanied by stronger growth in employment and a steady rate of unemployment.”
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With an important announcement from the ECB later this week, and a potential interest rate hike from the US later this month, we may be facing a period of volatility in the currency markets. If you have an imminent currency exchange requirement contact your account manager at the Foremost Currency Group to discuss your options. If you don’t already have an account, register for one for free and without obligation by following the link below.