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The market awaits the US Fed’s latest decision

Sterling runs out of steam

After mounting a recovery, the pound was pushed lower this morning ahead of the release of inflation data later in the day. In recent weeks, sterling has recovered more than half of the summer’s losses but the ongoing uncertainty over Brexit while the Supreme Court considers whether the PM was within his rights to prorogue parliament and Boris Johnson himself sticks to his pledge to take the UK out of the EU by 31st October.

The pound also made gains against the US dollar yesterday, oil prices had pushed the greenback higher at the beginning of the week but the market appears to be waiting for the outcome of the US Federal Reserve’s meeting later this week. Yesterday saw a brief rise but ongoing pressure on sterling meant that the rise didn’t last long and the pound fell back. Against the euro, sterling was flat at 88.56 pence having touched a three-month high on Monday.

Strong economic sentiment in Germany helps the euro

After some tough weeks, there was good news from the Eurozone as economic sentiment was improved in Germany and across the eurozone. There was a particularly sharp rise in Germany where the ZEW Indicator of Economic Sentiment increased from -44.1 to 22.5 in September. Eurozone economic sentiment beat forecast of -37.4 to rise from -43.6 to -22.4. An easing of tension between US and China and the possibility of averting a no-deal Brexit appeared to be helping boost sentiment; the overall outlook is not entirely positive and there is change on the horizon which is making the markets wary after an initial rise.

The European Parliament approved Christine Lagarde as the new President of the European Central Bank, replacing current ECB chief Mario Draghi. Ahead of that, inflation data for the Eurozone in August are released later today and may indicate whether Lagarde will make changes when she takes office on 1st November. However, the likelihood is that the market will be watching the US Fed closely to watch where the dollar may be moving.

All eyes on Powell

The US Federal Reserve is expected to cut interest rates today, but the market will be focussed less on their actions and more on what is indicated about whether or not this is the end of a mid-cycle adjustment. Oil prices have given the US dollar a boost in recent days, but while investors are wary of escalating tensions in the Middle East, the actions of the Fed and the US-China trade war are in much sharper focus. The Fed’s meeting started yesterday and the decision on the interest rate is due on Wednesday afternoon. 

The market appears to expect an interest rate cut; the greenback ended the day lower against a basket of other currencies, not only because of the anticipation of the Fed but also due to a fall in US yields. Renewed optimism over the US-China trade war briefly helped the dollar against the yen before it fell back to its initial levels. 

Disappointing data

The Canadian dollar was under pressure due to a disappointing manufacturing report. In July, Canadian manufacturing sales contracted by -1.3%. This was well below the forecast of -0.2% and sparked speculation that the Bank of Canada could becoming more dovish. The Australian dollar was still on the back foot following the dovish approach of the Reserve Bank of Australia and the New Zealand dollar followed it’s cousin down under towards weakness. 

While the market will be watching the US Fed closely, there are many other data released today, including UK and Canadian inflation and EU construction output but it’s likely that Jerome Powell’s speech will have the most effect on currency markets.

GBP: Pound stumbles ahead of inflation data

GBP: Pound stumbles ahead of inflation data

EUR: Sentiment skyrockets in Germany

EUR: Sentiment skyrockets in Germany

USD: Investors await the Fed’s announcement

USD: Investors await the Fed’s announcement

CAD: Disappointing manufacturing data puts pressure on Loonie

CAD: Disappointing manufacturing data puts pressure on Loonie

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