Yesterday, Fed chair Janet Yellen spoke at an economics conference and may use this platform to issue new monetary policy signals. In the event that Yellen does discuss rates and sounds hawkish, the EUR/USD rate could drop below the important $1.10 threshold.
The EUR/USD rate has already fallen by 2.1 per cent so far this month as investors become more confident about the Fed hiking interest rates in December and as the odds of a Donald Trump US presidency dip. However, the currency pair has found some support around $1.10 which is a more than two-month low.
Next week, on Thursday, the European Central Bank will make its next monetary policy decision.
The trend in recent months is the ECB has been backtracking from signalling an imminent expansion of Quantitative Easing and this ‘not so dovish anymore’ positioning is providing the euro with support, particularly against sterling. The GBP/EUR rate is currently holding around the key €1.10-€1.11 support zone.
Sterling
UK Prime Minister Theresa May will attend her first EU summit with European leaders next week and there is likely to be ‘off the record’ talks on Brexit given the several announcements we’ve had over the past two weeks from both sides. The agenda for this EU summit is migration, trade and relations.
EU president Donald Tusk said there will be “a hard Brexit or no Brexit” – meaning the UK cannot have both single market access and immigration control in any future deal.
Currently, Sterling is showing signs of some stabilisation around the $1.20-$1.22 price area against the US dollar, following a 6.1 per cent drop so far this month. The $1.20 mark appears, for now, to be shaping up as an important ‘tipping point’ to watch ahead of next week.
US dollar
The US dollar Index, the dollar’s value against a currency basket, was trading around a seven-month high ahead of US retail sales data yesterday. Friday’s US data was expected to show a solid bounce back in consumer spending last month. The report is important as consumers are the single biggest driver of US GDP.
Surprisingly, one non-voting member of the Fed, Patrick Harker, commented on the US election on Thursday. But, unsurprisingly, he said the Fed may want to ‘hold off’ on future rate rises until we know the US election result on November 8.
“According to market data, there is currently an eight per cent chance of a rate hike at the Fed’s November 2 meeting, and a 65 per cent chance of a hike at the December 14 meeting. Next week, on Wednesday, we have the final US Presidential head-to-head debate between Hillary Clinton and Donald Trump. If Clinton pulls further ahead, I would expect USD strength to continue.”