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USD under pressure, EUR up, GBP up and down

USD under pressure, EUR up, GBP up and down

Trading throughout yesterday and overnight saw various currency pairings test record levels, as markets reacted to various comments from central governments in addition to the usual data releases. EUR/USD is looking to a break the $1.40 level, with comments from the US administration suggesting that it is happy with the current slide in the USD. Meanwhile, the dollar is again trading close to 15 year lows versus the yen, prompting Japan’s PM to say that the government will take decisive steps if needed, though as yesterday’s graph suggested, this will only temporarily delay what is a fundamental decline in Dollar valuation. With Japanese interest rates now as good as zero, the BoJ must realise that it is the Fed that holds all the cards to stop the Yen appreciation against the Dollar that is severely hurting exports. The AUD is hitting off 27 year highs versus the USD, with strong Australian labour market data for September reviving talk of a hike in interest rates by the RBA.
 
Yesterday saw the release of Reuters latest consensus forecast on the outlook for the FX market. Reflecting recent moves, the market’s expectations that the euro would retreat versus the dollar over the medium term has not changed but the values certainly have. The market now sees dollar/ euro at $1.36 in one month, $1.35 in 3 months and $1.30 in a year’s times. In the September poll, medium forecasts showed level of $1.26 in one month, $1.25 in 3 months and $1.23 in a year’s time. Thus, the euro is expected to continue benefiting from the prospect of further monetary support for the US economy from the Federal Reserve. Volatility in the euro is also expected to be high over the coming month, reflecting current market uncertainty. The yen is also expected to weaken versus the dollar over time but by less than markets were pricing in September. The yen is now seen at 83 versus the dollar in one month, 88 in 6 months and 92 in a year. This compares with 85, 89.5, 95 as seen in the September poll. Forecasts for sterling versus the dollar has also been revised upwards but short term the UK currency is expected to remain under pressure versus the euro as it outperforms versus the USD.
Today, we have the outcome of the monthly MPC meeting. Despite some talk, most obviously from MPC member Posen, of the need to expand asset purchases, it is expected for the Committee to remain on hold, both in terms of Bank Rate and the size of QE. The first serious look at the question of whether to expand asset purchases will come in the November Inflation Report meeting. Likewise, the ECB announcement this afternoon will almost certainly result in holding interest rates at 1%, describing current policy settings as ‘appropriate’.

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