- EUR exchange rates softened last week on Brexit fallout – Italian banking crisis undermined trader confidence
- BoE interest rate decision to dominate trader focus – Will the central bank cut the benchmark interest rate?
- US Dollar forecast to cool amid overvaluation concerns – Long delays predicted to tighter Federal Reserve policy outlook
- EUR exchange rates forecast to hold losses – Lower bond yields to reduce the impact of the European Central Bank’s (ECB) asset purchase programme
The Euro ended last week in a weakened position amid concerns that Italy’s banking crisis poses a greater threat to EU stability than the UK’s Brexit vote. Additionally, fears that the rising price of bonds will limit the impact of the European Central Bank’s (ECB) quantitative easing programme also weighed on demand for the shared currency.
Meanwhile, Sterling ended the week in a stronger position thanks to consolidative trade, whilst the US Dollar continued to hold a position of strength thanks to positive labour market data.
How is the Euro likely to perform over the week ahead? Well, while ecostats from the Eurozone may have an impact, the main driver of Euro exchange rate shifts is likely to be ongoing concerns relating to the Italian banking crisis and the potential spread of Eurosceptism.
EUR Exchange Rates Forecast to Decline on Brexit Fallout
The impact of Brexit has already been felt globally, especially its influence over market sentiment. A general lean toward demand for safe-haven assets is having a massive impact on bond prices and yields. As explained above, lower yields and higher prices is bad news for the ECB.
‘It significantly reduces the ECB’s room for manoeuvre,’ said Frederic Ducrozet, senior European economist, who estimated 63% of German debt yields to be below the deposit rate. ‘It may eventually force the ECB to buy more of the higher-yielding bonds in the likes of Spain and Italy.’
The crisis facing Italian banks will also likely cause Euro headwinds. The recently created EU banking group has outlawed the use of public funds to bailout banks, stating that creditors must be used.
The difficulty is that creditors usually have difficult demands to meet before they are willing to lend. What’s more, the crisis requires swift intervention. This may cause Italian Prime Minister Matteo Renzi to defy EU law, undermining the stability of the organisation.
With a distinct lack of influential domestic data this coming week, market sentiment will be the main driver of Euro volatility. US data will also be of interest given that the EUR USD exchange rate is negatively correlated.
Pound Sterling Exchange Rates Forecast to Soften ahead of BoE Interest Rate Decision
The Bank of England’s (BoE) Financial Stability report strongly hinted that the central bank will ease monetary policy in order to combat the fallout from the UK’s Brexit vote. Markets have now priced in a 75% chance that the central bank will cut the base rate on Thursday.
With that in mind, the Pound is unlikely to sustain any marked gains ahead of Thursday’s BoE interest rate decision. Most analysts predict a 25 basis point cut from the record-low 0.50% benchmark interest rate.
Over the last week the Pound recovered some of its multi-year losses thanks to consolidative trade. That could mean that Sterling avoids any significant depreciation ahead of the BoE rate decision amid concern of undervaluation.
However, the domestic political and economic landscape remains uncertain which will continue to undermine investor confidence.
The fallout from Brexit is already beginning to impact domestic ecostats. Last week saw the GfK Post-Referendum Consumer Confidence report which showed the sharpest fall in confidence since 1994.
US Dollar Exchange Rates Forecast to Cool amid Overvaluation Concerns
After safe-haven demand pushed the US Dollar to multi-year highs versus its major peers in the aftermath of Brexit, concerns that overvaluation would cause the Federal Reserve to delay a cash rate increase prevented marked US Dollar gains last week.
USD Exchange rates are still holding a comparatively high trade weighting, which was why the ‘Greenback’ (USD) failed to capitalise on Friday’s jobs data which saw Non-Farm Payrolls rise the most in eight months.
Given that the Federal Reserve is expected to delay a cash rate increase amid weak global economic conditions, domestic data may not be as impactful as it would ordinarily.
However, there are still a number of influential domestic ecostats with potential to provoke USD exchange rate volatility.
Of most significance will be the Import Price Index, Advance Retail Sales, Consumer Prices and the University of Michigan Consumer Confidence report.
During Friday’s European session, the EUR GBP exchange rate was trending within the range of 0.8502 to 0.8576.
In the same period, the EUR USD exchange rate was trending within the range of 1.1001 to 1.1121.
