A quarter of change
Coming into the end of the month and the end of the third quarter, currency markets remain pretty sanguine. Q3 was the worst quarter for stocks since 2011 and has been the setting for an upheaval in economic and investor sentiment. Pressures from politics, policy, risk and demographic changes have shown themselves in the past three months and will need putting to bed before the job of a global recovery can be continued and solidified.
Few political pressures will be greater in the coming years than the UK’s referendum on EU membership. Unfortunately Corbyn’s speech yesterday to the Labour party conference mentioned no policy decisions on the matter. The hope remains that the Labour leader will listen to the received wisdom within the party that a Brexit is not conducive to economic progression for the people that it represents.
Sterling trading on others today
Sterling traded sideways through yesterday’s session as was to be expected with the dearth of news. Today we will see some volatility in GBPEUR as around EUR3.3bn is transacted as part of the Single Farm Payment schedule from the EU to British farmers. The volatility of the past few days is a natural precursor to this annual occurrence and the recent strengthening of the euro is great news for those who a few months ago were looking at prices in the 1.40s.
Euro set to enjoy Q4?
Indeed, the number of people who are starting to suggest that the euro has further to run higher is increasing. HSBC, for example, has increased its price target on EURUSD at the end of the year to $1.10 from $1.20 on the basis that the European Central bank is not going to increase its QE push in the coming months, alongside the fall in risk sentiment and a slight softening in expectations around Federal Reserve policy.
As an exercise, if HSBC were proved to be right on EURUSD hitting $1.20 at the end of the year and our thoughts on GBPUSD were also proved correct, a dip to 1.50, then GBPEUR would be trading at 1.25.
The day ahead
Granted, the single currency will need stronger data to justify that increase as well as the ECB’s postponement of additional stimulus. Yesterday’s German inflation numbers missed estimates and we are looking for the overall European number to fall into negative territory this morning.
UK GDP is also due today and while this is the final reading of Q2 and therefore is a rather stale pronouncement of the UK’s economic health, investment and services data will be parsed to indicate the level of future strength. As we wrote on Monday, manufacturing data in the UK – and globally to be fair – has slumped in the past year and the services side of things is keeping the UK economy afloat.
The overnight miss on the latest consumer confidence readout in the UK will be lost on nobody.
Elsewhere today we are starting to get ready for a busy end to the week with manufacturing reports throughout tomorrow and Friday’s US jobs market release. Today’s ADP number will always be used as a precursor to the official payrolls announcement; market expectations are for a gain of 190,000 jobs in September.