Euro in the driving seat

As expected the average British summer delivers the odd rain shower, perhaps a thunderstorm here and there, or even a deluge of flooding. The same expectations can be matched to the pounds performance which, up until last week was enjoying clear blue skies and basking in seemingly endless sunshine. That is until the Bank of England dampened eager anticipation of a move towards an interest rate rise in the UK. 

Since then, the British pound has taken cover from a jolly good drenching and has stayed well hidden behind his cloud. He popped out briefly yesterday, recovering from a one month low against the Euro as UK House prices reported a rise to +44 in July from +40 in June. This morning the pound is tucked behind his cloud again as the Euro heads for its biggest week, after China devalued the yuan and Greece edges closer to securing a bailout. 

The Euro is up against all 16 major peers, except the Swedish krona, as the market had become concerned that a stronger US Dollar will delay the Federal Reserve from raising interest rates sooner. The Dollar strengthened on better than expected Retail Sales figures. 

The euro has risen 1.6 percent this week to $1.1144 as of this morning, marking its biggest move since May. Greek lawmakers are currently voting on legislation this morning to unlock as much as 86 billion euros ($96 billion) of aid, before a 3.2 billion-euro payment is due to the European Central Bank on Aug. 20. 

Reassurances from Chinese officials on Thursday that they’ll limit excessive volatility, coupled with the growth in U.S. retail sales, have eased traders’ concerns about the Federal Reserve’s ability to increase borrowing costs. China has set the yuan’s reference rate at 6.3975 per dollar, raising it for the first time since Tuesday’s devaluation. There’s a 48 percent chance that the Federal Reserve will raise its interest rates in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

Australia’s dollar has gained 0.3 percent to 73.79 U.S. cents, reducing its decline since Aug. 7 to 0.5 percent. New Zealand’s currency fell 0.6 percent to 65.34 U.S. cents, after retail-sales growth slowed in the second quarter. The kiwi has tumbled 1.3 percent this week. 

For today’s data, the German preliminary GDP reading this morning fell short of expectations, but has not troubled the Euro. Later in the day we have Manufacturing Sales from Canada, and also more data from the USA to guide the market on the “will they /won’t they” put up interest rate scenario. At 1.30pm is the US Producer Price Index, and at 3.00pm the preliminary reading on Consumer Sentiment from the University of Michigan.