The pound saw out a week of recovery in style, climbing to a four month high against EUR and a two month high against USD. This follows yesterday’s optimistic comments from European Commission President Jean-Claude Juncker that “we can have a deal” and that “Brexit will happen”. Perhaps the most significant of his statements was his admittance that he would be prepared to agree to an alternative to the Irish backstop. With Prime Minister Boris Johnson set to unveil his alternative solution to the backstop at next week’s UN meeting in New York, investors are optimistic of avoiding a ‘no deal’ Brexit and the uncertainty that would bring.
The hope of a breakthrough in Brexit negotiations was enough to diminish the impact of negative UK data in the middle of the week. UK retail sales for August were down 0.2% MoM, falling against the 0.4% rise the country saw in July. YoY this equated to a 2.7% increase, down from 3.4 in July.
However, Wednesday’s disappointing CPI inflation data, reflecting a slowing of growth to 1.7% (down from investors’ prediction of 1.9%), was counteracted by the Bank of England holding interest rates at 0.75%. A unanimous decision by the BoE on Thursday was enough to stabilise the pound, before Juncker’s comments later that day pushed the pound even higher.
A strong start to the week saw the euro make marginal gains against the pound on the back of positive ZEW investor sentiment. Germany’s sentiment data showed a rise from -43.6 to -22.4 in August, outperforming expectations of a -32.2 reading. This would be short-lived however, as the ongoing Brexit negotiations and yesterday’s significant comments from Juncker saw the euro continue to give ground to the pound. The euro is now at its lowest against the pound for four months with the increasing likelihood of a withdrawal agreement being passed for the UK’s departure from the EU.
EUR/USD was in for a rollercoaster week too as investors flocking to the USD as a safe haven amidst the rise in oil prices early this week were enough to stifle the euro against the dollar. However, Wednesday’s Fed rate announcement was enough to gift the euro a 0.1% gain against the US dollar. It was impacted further by Boris’ trip to Luxembourg to visit the European Commission’s President, Claude Juncker.
A dramatic week for the US dollar was dominated by the fallout from drone attacks on Saudi Arabia’s production facilities. This resulted in 5% of the world’s oil supply being temporarily halted, which saw prices surge nearly 20% and gave a boost to the greenback against many of its European counterparts.
However, the ongoing tension also spelt good news for JPY, CAD and NOK against the USD, while investors then turned their focus towards Thursday’s rate decision from the Federal Reserve. A cut of 25 basis points by the Fed to between 1.75-2% was exactly what investors were expecting, if not a little shy of a 50 basis point cut that some had hoped for. Mixed signals regarding future cuts have led to much speculation over what to expect for the rest of the year and in 2020.
With many investors seeing the cut as necessary, it did little to boost the USD significantly against any the euro and pound. While weak Chinese production growth was also there to bail out the dollar, its midweek gains against the pound were reversed by the potential breakthrough in Brexit negotiations.
CAD’s week was closely tied to the impact of the Saudi drone attacks and oil prices, however despite the world losing 5% of its oil supply there was only a temporary spike in the CAD and since then it has lost almost all its gains.
A poor week for the Australian dollar has seen it approaching a decade low against the dollar, ahead of more potential cuts from the Reserve Bank of Australia.
Minutes released on Tuesday revealed the RBA is considering further cuts amidst growing concerns over the trade war between the US and China. AUD continued to suffer as a surprise increase in unemployment, rising by 40 basis points in the last six months, further stoked the fears of more rate cuts for investors.
The US Fed rate decision also had an impact and saw the risk-sensitive Australian dollar lose out to its British counterpart. The current performance has led many to believe there is a need for additional stimulus from the Reserve Bank of Australia but with so much uncertainty over global trade and domestic numbers missing forecast, it is difficult to predict how, and when, they may act.
NZD, like its Australian counterpart, endured a disappointing week. While data showed the economy beat expectations to grow by 0.5% in Q2, manufacturing and construction weight on goods producing industries fell by 0.2%. This data was enough to drive the kiwi lower in total against the pound, euro and dollar, when added to the blow dealt by the US Fed cut.