Weekly Brief

Deflation worries amidst EUR strength


A light data calendar did not prevent some sizeable swings in GBP. At the beginning of the week, the signs were good, with the pound continuing its rally against the US dollar, as markets continued to fade the Fed. It reached a high of $1.3482 on Tuesday, having closed the previous week at $1.3353. From there though, the pound reversed and headed lower, as first the Bank of England MPC members talked up the prospects of additional monetary loosening, and then the limited data and survey releases pointed to a less impressive rebound in services. It reached lows of sub $1.3250 on Thursday, ahead of the US non-farm payrolls release on Friday. Against the euro, the pound also disappointed, slipping back beneath €1.12, having rallied only 0.6% from last week’s close of €1.1215.

To recap the main data, Tuesday’s release of July consumer and mortgage lending figures recorded a rebound in both unsecured and secured lending. The former rose by £1.2bn and the latter by £2.7bn. The final August manufacturing PMI reading was revised down to 55.2 from the 55.3 preliminary outturn. Wednesday’s Nationwide house prices index for August reported a sharp jump of 2% in prices MoM, with pent up demand, the stamp duty holiday and behavioural shifts prompting the largest monthly rise in prices since 2004. That was overshadowed by BoE Deputy Governor Ramsden’s comments to the Treasury Select Committee that stated the central bank had a lot more firepower left, and could deploy it much faster if necessary. Thursday’s final August services PMI was also revised down from initial readings, leaving markets on a downbeat note. Next week’s data calendar will focus on Friday’s slew of data, including July’s GDP, industrial production, index of services and trade balance figures.



The European Central Bank are clearly watching the performance of the euro against the US dollar. When ECB Chief Economist Philip Lane made mention that this was a factor in ECB discussions on Tuesday, it gave the FX markets pause for thought. Having topped $1.20 briefly on Tuesday, EUR/USD dropped below $1.18 on Wednesday. Though it recovered a little of its lost ground in late trading on Thursday, markets clearly heeded the warning. Ahead of Lane’s comments, the markets should have been shaken by the provisional August consumer prices figures. These recorded inflation back into negative territory on a headline basis, and core inflation at its lowest recorded level of just 0.4%. Deflation fears have picked up in the Eurozone and the ECB may have to do something additionally to correct them.

The fundamental data and surveys were, in short, not much to write home about. The unemployment rate in July rose to 7.9%, up from 7.7% in June, although that was below the 8% expected. There was an upward revision in the Eurozone services PMI. The final August reading rose to 50.5 from 50.1 initially recorded. However, this was only due to a jump in the German reading, with Spanish and Italian readings dropping MoM, and the French outturn downwardly revised. German factory orders for July were released first thing this morning and showed that orders rose 2.8% on June’s outturn. This left them 7.3% lower than a year ago. This was a sizeable disappointment against market consensus expectations, which had expected an increase of 5% on the month. Attention now switches to next week. German industrial production, Eurozone Q2 employment and final Q2 GDP are all released ahead of Thursday’s ECB Governing Council meeting and press conference.



On the whole, the dollar performed well against the euro and pound this week, but probably not because of anything the US economy did. Against the JPY, the USD rallied from last week’s lows, but the gains from ¥105.20 were less than 1%. The USD may also have benefited from a reduction in risk appetite as equity indices dropped back between 2.75% and almost 5% amidst a tech sell off on Thursday.

The data, surveys and events from the US started positively with the August manufacturing ISM reading (at 56) comfortably topping market consensus. In addition, vehicle sales outstripped expectations for August as well. However, as the week wore on, data began to turn more mixed, with the ADP employment change reading for August recording less than half the expected increase, and the Federal Reserve’s Beige Book offering conflicting signals. Activity was increasing, albeit modestly according to the Fed, but there were signs that firms were preparing for layoffs as government support schemes wound down, and individuals and businesses in loan arrears were increasing. On Thursday, the jobless claims figures dropped to 881k, the lowest reading since 13th March, but later the same day, the services ISM undershot expectations for the August outturn, dropping to 56.9 from July’s 58.1. Friday’s release of non-farm payrolls is the keynote release of this week. Whether it outperforms or underperforms, the consensus could seal a much better performance for the dollar this week, or prompt it to give up recent gains. Next week’s consumer prices data and the budget deficit figures for August are the likely highlights of an otherwise relatively quiet data week.



The CAD benefited in the early part of the week, much the same as most other currencies, as the US dollar remained out of favour. USD/CAD made fresh seven-month lows on Tuesday, dropping just below C$1.30 and enjoying some benefit from a broad based commodity rally, after Chinese PMI figures signalled an accelerated recovery. The Canadian dollar’s fortunes turned quickly though, and by Thursday USD/CAD was higher than where it had begun the week, rising to a high of C$1.3162.

Some improved manufacturing PMI figures for August and July trade figures were the only notable data release in the first four days of the week. These showed the highest manufacturing PMI reading since Markit records began in 2017, and revealed overall trade to be back to within 5% of pre pandemic levels. Exports and imports were up 35% from the lows in April. Today’s August labour market figures from Canada aren’t of the same importance as US non-farm payrolls, but still hold significant interest for the CAD. Employment is forecast to be up 250k, after a 418.5k increase in July. That would still leave employment over 1.1m lower than in February, but would mean that Canada has recouped around 60% of jobs lost, markedly better than the US performance to date. Next week’s big event is the Bank of Canada monetary policy decision on Wednesday.



The AUD peaked against the USD on Tuesday, reaching a two-year high of $0.7414. A rally in gold and other commodity prices was certainly helpful for the AUD, but that rally was driven by improving China metrics, something less likely to benefit the AUD because of heightened trade and diplomatic tensions between the two nations. The AUD reversed course following the Reserve Bank of Australia’s monetary policy meeting, which did not alter interest rates, but did add a further A$57bn into the Term Funding Facility. This allows banks to borrow up to 2% of outstanding credit balances at low interest rates from the RBA. This additional monetary loosening prompted the AUD to drop back down to $0.7265, and it reached fresh lows on Friday morning at $0.7251.

The outlook for the AUD is linked to the tensions between China and Australia. Whilst the headline Australian trade figures suggested the country retained a healthy, though diminishing surplus, the detail showed declines in both rural and non-rural exports as well as services. Next week’s raft of business and consumer sentiment figures should be watched more closely bearing in mind the current state of nervousness amongst policy makers.



The NZD was also an early week winner, rising by almost 1% from Monday’s open of $0.6725 to Wednesday’s high of $0.6789. Since then though, the NZD has dropped back below Monday’s open and below $0.67. New Zealand authorities have reacted swiftly to a fresh wave of coronavirus cases in Auckland, and that, along with falls in commodity prices are the likely drivers behind the drop in the NZD. Rallies for commodity currencies had been fairly consistent, and the NZD likely suffered the same profit taking that we saw in the AUD and CAD, both of which underperformed against the ZAR and BRL.

This week’s data and surveys weren’t of any particular note, with business confidence improving marginally from its provisional August reading, but down on July, and July building permits dropping 4.5% on June’s outturn. Next week sees a limited data calendar also. Manufacturing PMI figures for August are a likely focus for markets and could show the damage the renewed lockdowns may have done to business activity.

Whatever your payment needs are, we've got you covered...

Personal payments

Personal payments

With a personal account you can enjoy competitive exchange rates and low fees on all your payments.

Find out more
Foreign exchange business solutions

FX business solutions

We provide tailored services to help companies make global payments and manage their foreign exchange risk.

Find out more
Travel money

Travel money

Order your travel money for branch collection or secure it on our explorer multi-currency Mastercard®.

Find out more