Drive for currency markets continued to come from diverging policy outlooks for the European Central Bank and US FOMC. The economic data released in the eurozone was marginally hopeful, but not good enough to erase speculation over more policy action. Compounding the euro’s outlook was increased tension going into the weekend’s release of the ECB stress tests on the 130 largest European banks. Not all of the banks were expected to pass the test. In the US, economic data continued to reveal a moderately expanding economy with a small increase in price pressures. UK economic data revealed a slowdown in consumer demand, but the Bank of England minutes continued to see two of the nine policymakers voting in favour of a rate increase at the October policy meeting. Chinese PMI manufacturing figures did little to improve sentiment despite the small expansion. Sentiment was soured mid-week by a terrorist entering the parliamentary building in Canada. The biggest mover this week was the New Zealand dollar, however. Inflation figure during the third quarter declined substantially from the prior period, increasing speculation that rate increases would be pushed back, which damaged the local currency.
Euro
Side stories limited the euro’s ability to hold on to gains this week, but the best news out of the eurozone came from Germany. The flash PMI manufacturing survey for the month of October showed the country’s sector starting the fourth quarter in expansion, in stark contrast to the French figures that showed its manufacturing sector slipping deeper into contraction. Nevertheless, knowing that Germany continued to sputter along, helped limit the euro’s losses. In the meantime, reports circulated that the ECB was considering the purchase of corporate bonds. The news broke as the central bank embarked upon its covered bond purchases promised at the September policy meeting.
Sterling
Sterling took back some of last week’s losses when CPI figures fell to levels not seen in five years, putting a serious dent in sterling’s outlook as it called into question the need for rate increases. The BoE’s policy meeting minutes from the October meeting revealed that even with weak price pressures two members continued to vote in favour of a rate increase. Nevertheless, sterling’s retracement higher was tripped up again when retail sales figures were released below forecast, calling into question the strength of the consumer. Several policymakers feared demand was unsustainable given weak wage growth.
US dollar
US existing home sales came in higher than forecast. Consumer prices in the US rose faster than expected. The data seen this week continues to support the economic recovery story and was supportive of the US dollar as sentiment improved after last week’s rout in equity markets.