The price of oil dictated broader market sentiment and currency market movements at the beginning of the week. The presumed oversupply of oil coupled with concerns over weaker global growth sent the price below $50 per barrel for the first time in nearly a decade. Not only were global growth concerns highlighted this week, but also reports of a possible Greek exit from the eurozone after elections and the European Central Bank embarking upon additional policy measures became driving forces behind currency market movements.
Euro
The economic data seen in the eurozone this week was mixed but the figures were not enough to prevent the euro from touching nine-year lows against the US dollar. Focus on the flash eurozone inflation figures was amplified by comments from ECB president Mario Draghi, who said discussions were under way over the size, composition and frequency of balance sheet adjustments at the ECB. The fact that inflation figures were released below forecast and in negative territory heightened speculation that the central bank would be forced into some form of policy action. Germany’s own inflation rate dropped to a five-year low. Eurozone core inflation actually rose, but the jury is still out on whether the ECB will be able to view the decline in the headline release as transitory. On balance, the data continued to support the view that the ECB could embark upon additional policy measures at its next policy meeting, which sent the euro lower.
Sterling
The Bank of England announced it was leaving its monetary policy unchanged. Amid the Paris terror attack and a falling euro/dollar exchange rate, the announcement was hardly heard. Sterling dropped 18-month low against the US dollar while managing to hold on to levels near two-month highs against the euro. Economic data released in the UK maintained the view that the central bank will hold a more neutral outlook on policy. The UK services sector slowed, while the pace of growth in the construction sector dropped to levels not seen since July 2013. A BRC retail sales survey showed prices falling.
US dollar
The US dollar continued to roar this week. The dollar index rose to a 10-year high on the view that the FOMC will be the first major central bank to raise interest rates since the financial crisis. While US economic data was mixed, the FOMC minutes supported the opinion that a mid-summer rate increase was still in the cards and that policymakers were willing to look past the recent decline in oil prices and the negative impact it will have on producer and consumer prices. Nevertheless, markets will continue to keep a close eye on economic data as a slowdown in economic growth was seen in figures this week. Factory orders fell while construction spending also declined. On a positive note, the jobs market was seen growing according to an ADP employment report, while non-farm payrolls expected at the end of the week were forecast to rise.