Equity markets fell sharply while a collapse in demand for emerging market currencies intensified amid concerns that minutes from the Federal Reserve will strengthen the case for a cut in US monetary stimulus starting next month. The outperforming British pound has slipped despite hitting two-month highs against the US dollar, with the US currency climbing to multi-year highs against a number of its emerging counterparts, particularly units from Asia. To go alongside sharp gains against the South African rand and Thai Baht this year, investors have bid the US currency to multi-year highs against rivals from India, Indonesia and Malaysia as they aggressively rotate back into developed markets and away from emerging assets, which have been fuelled by Federal Reserve money printing in recent years. Volatility across currency markets may gather momentum depending on whether minutes bolster concerns that the Federal Reserve will start cutting back on quantitative easing following its September policy meeting.
Sterling
Forecasts from the Confederation of British Industry underlined growing optimism about Britain’s economic recovery, pushing sterling further north to reach a two-month high against the US dollar and close to seven-month highs against a basket of currencies. The CBI upgraded its UK GDP predictions for this year and next following a string of better-than-expected data in recent months. Faster growth expectations have been fuelling bets that not only will the Bank of England not add to monetary stimulus, but may even have to consider higher interest rates sooner than it expects.
US dollar
Despite US dollar weakness against its main rivals such as the British pound and Japanese yen, investors bid the US currency to multi-year peaks against a number of emerging market currencies amid worries about US monetary policy ahead of Federal Reserve meeting minutes. With the US economic recovery getting up to full speed and the Federal Reserve leaning towards tapering its stimulus programme, investors are aggressively rotating from emerging markets back towards economies in the developed world.
Euro
The euro rose slightly and is currently trading about 0.5 per cent shy of a registering a two-month high against the US dollar ahead of Federal Reserve meeting minutes after a confident-looking economic growth outlook from Germany’s Bundesbank. Germany’s central bank also warned that low interest rates from the European Central Bank was not unconditional, and that inflation risks could alter the ECB’s forward guidance policy.