Sterling buoyed by positive UK GDP reading

Key Movers

Short-term market volatility was witnessed again last week, as the US dollar fell 3.29%, 1.75%, 1.32%, and 1.11% versus the Japanese Yen, Euro, Aussie dollar, and British Pound respectively in just the space of a week. Furthermore, since its 20-year and 5-month high on September 27th, the Greenback has lost an impressive 14%, 13.2%, 13%, and 8.3% versus the British Pound, Yen, Euro, and Aussie dollar respectively. The EURUSD rate rose to a 9-month high last week, hitting 1.0868 on Thursday following an impressive rally. Confidence in the Eurozone economy has returned of late, with German GDP reinforcing this last week. There is speculation now that the ECB has the room to raise rates faster than the other major central banks and the Euro is certainly benefitting from such sentiment.

US inflation has also eased off, with a year-on-year reading of 6.5%. Goods prices continue to fall while upward pressure is prevalent in the service sector. This means the Fed is happy to see the CPI heading in the right direction. The issue is whether the Fed will raise its rate to the 5-5.25% band or stop at 4.75-5% and whether it will move in 25 bps or 50 bps increments. It looks as though the aggressive pathway of rate hikes in the US once expected may have now eased off, and thus the US Dollar is on the back foot.

This week sees The Eurogroup leaders meeting today and tomorrow, as well as European ZEW tomorrow and the ECB meeting minutes on Thursday. The market is looking for clear signs of if the European recovery is sustainable and if interest rates can continue on an aggressive path, which could support the Euro further.