Foreign exchange trading was relatively flat, reflecting nervousness ahead of what could be a very challenging week for global markets as investors ready themselves for another dose of forward guidance from several central banks on top of some big-hitting economic data from the US.
The second quarter GDP report from the world’s number one economy, the US, could be overshadowed by the Federal Reserve’s policy announcement with the US dollar going into both releases on the back of a third straight weekly loss against a group of currencies.
The US currency could have further to fall amid concerns the Federal Reserve may consider a new strategy of forward guidance to ensure markets fully understand its “low rates for years” message. Investors will also examine the usual blockbuster data, US non-farm payrolls, as they continue to speculate about when the Federal Reserve will start tapering its monthly bond buying programme.
Although very positive, robust UK second quarter GDP data was unable to offer the British pound a more substantial lift in currency markets ahead of the Bank of England’s policy decision.
The euro’s outperformance in recent weeks has come as a surprise to many and Draghi’s comments could prove pivotal for the single currency, assuming that investors can get all the answers they need about US monetary policy.
Sterling
The Bank of England’s decision should contain no further surprises just yet from Governor Mark Carney about UK monetary policy, although uncertainty about another rare statement could weigh on sterling ahead of the announcement. Nevertheless, the BOE Governor is expected to unveil a new monetary policy agenda in the bank’s Inflation Report on August 7, with a more dovish bias likely to prove damaging for the British pound.
US dollar
The week ahead does not get any bigger for both US and global financial markets, with investors waiting to hear about the strength of the US economy and how close the Federal Reserve is to winding down monetary stimulus. US GDP data is expected to show slower growth over the second quarter although its impact may be subdued ahead of the Federal Reserve’s policy announcement.
Euro
Economic data on eurozone inflation and unemployment may ease pressure on the European Central Bank leading up its policy announcement. A statement from ECB President Mario Draghi with less emphasis on considering unconventional and euro-negative policy options could extend the single currency’s recent out performance.