Poor UK Data Sees Sterling Trade in a Tight Range

Daily Market Report – June 3rd

It was a fairly quiet day for the currency markets yesterday, with no significant movement in any of the major crosses. After a small adjustment as markets opened for the week, GBP/EUR traded within a 20 pip range. It was a similar story for GBP/USD, with 30 pips between the high and low of the day. The graphs below show movement in the two crosses over the last 24 hours.

charts

Despite some key announcements on Wednesday and Thursday, trading may remain subdued as market players await the European Central Bank’s interest rate decision on Thursday before committing to their next positions. It’s now widely expected that Mario Draghi will announce an alteration to the ECB’s monetary policy on Thursday morning, with Draghi stating that the ECB are ‘finally ready’ to act to fight deflation.

Speculation of an interest rate cut has been mounting since it became clear that inflation in the Eurozone was beginning to slow. Historically, central banks would cut interest rates to combat slowing inflation. Theoretically, lower interest rates would encourage consumer spending, rather than saving, with the increase in expenditure driving prices up. With interest rates in the Eurozone already at record lows, Draghi has little room to manoeuvre. An interest rate cut from the ECB is now expected as inflation remains well below the Bank’s 2% target. It will be interesting to see what affect the announcement has on the strength of the euro; much of the movement may have already been priced in following Draghi’s announcement at the last ECB policy meeting. In his speech following May’s policy meeting, Mario hinted at the prospect of interest rate cuts and the euro has since lost 1.5% against the pound as a result.

It may have been a quiet day for the markets yesterday but there was a fairly significant political announcement from one of the eurozone’s biggest economies. Spain’s king Juan Carlos announced that he had had enough of being king, passing the reigns to his son, Felipe. The announcement caused uproar amongst the Spanish people, with tens of thousands of Spaniards taking to the streets on Monday night, demanding a referendum on the future of the monarchy. Police estimated that over 20,000 people descended on Madrid’s Puerto del Sol square, and thousands more on Barcelona’s Catalunya square. The announcement comes at a time when the Spanish seem finally to have overcome the worst of the recession, having had their credit rating recently upgraded as employment conditions improve and GDP heads back into positive territory. The ECB will be hoping this doesn’t derail their fragile recovery.

Data Announcements to Look Out For

Over the next few days there are a few pieces of data that may affect exchange rates. Eurozone CPI figures are out this morning, which will likely show a further slowing in the rate of inflation within the currency bloc. Tomorrow sees the release of Eurozone GDP figures which will provide an insight into the state of the collective euro economy as a whole.

Written by James Baxter 03/06/2014

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