Sterling has seen some impressive gains of late, with GBP/EUR hitting 1.18 and GBP/USD moving above 1.36 on Monday. The GBP/EUR rate is particularly impressive, not having breached 1.18 for some time and at one point was only 30pips from an 18-month high.
There was however little justification for the spike, and this could result in the gains being short lived. There is an increasing concern over what is being described as an energy crisis and import and export is experiencing trouble due to Brexit legislation.
If you have a requirement purchasing Euros, it could prove wise to take advantage of current levels, we have now witnessed, for over a year and a half, 1.18 holding up as a firm resistance point with the market falling each time 1.18 is breached.
The catalyst could have been better than expected economic growth data, there were fears of ‘stagflation’ – where an economy suffers high inflation, poor growth and high unemployment. These fears were calmed when economists were proven wrong and the UK economy proved to be a lot closer to it’s pre-Covid size than previously predicted.
Later today we will witness Industrial and Manufacturing production along with GDP. There is predicted to be a fall from 1.2% to 1% on Industrial production and there is expected to be no change on manufacturing remaining at 0%. If figures land away from expectation expect volatility on the market. GDP is no doubt the most influential data release and there is expected to be a rise from 0.1% to 0.5% which could benefit the Pound.
Inflation levels in the bloc are becoming an increasing concern. Many economists have stated that there is no indication that the rise will be sustained.
European Central Bank board member, Isabel Schnabel has said that the sharp rise in inflation could prove sustainable if workers start to expect higher prices and demand wage increases.
Schnabel has reiterated the ECB’s official line that the rise in inflation will subside next year; despite the year-on-year (Sep-Sep) inflation data from Eurostat showing an increase of 3.4%.
She did however add a caveat.
“It would be premature to assert that current price dynamics will fully subside next year,” Schnabel told a joint conference organised by the ECB and the Cleveland Federal Reserve. “There are several sources of uncertainty that might entail more persistent inflationary pressures.”
Amongst them, she listed potential changes in inflation expectations and in people’s behaviour when it comes to setting wages and prices.
“As we form our assessment of the medium-term inflation outlook, we keep our finger in the wind to determine whether the breeze will turn out to be more long-lived than just a transitory gust,” Ms Schnabel said.
Current predictions from the European Central Bank (ECB) are inflationwhich is set to be at 2.2% this year, then drop to 1.7% for next year and for 2023 it is predicted to fall to 1.5%.
If current inflation levels prove not be an anomaly caused by Covid and continues to rise without wage growth this could have a serious long term effect on the Eurozone economy and in turn the Euro.
Today we will witness the release of Eurozone Industrial production data, there is expected to be a fall from -1.5% to -1.6%. If data lands away from predictions, we could see a change in Euro value.
The US Dollar has benefited against a host of major currencies of late due to concerns over the global economy. The US Dollar is considered a safe haven currency and as such it is the destination of choice for investors when risk appetite is down. Evergrande, the second largest property group in China is in a debt crisis with bondholders stating they are yet to receive interest payments equating to $148m.
The situation with Evergrande could have a global economic impact and this has proved to be a catalyst for the Dollar.
There is also the energy crisis in Europe and the worry of high inflation in the bloc which is also causing investors to remain cautious in these times of economic uncertainty. Again, the Dollar looks to be the destination of choice.
US Consumer Price Index (CPI) data is due out later today and there is expected to be a slight increase from 0.1% to 0.2%. CPI is a measure of price movements between various services and goods, a measure of inflation. If data does not land close to the estimate, we can expect volatility for any USD pairings.
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