'Currency War’ and Quantitative Easing Measures Shaping Exchange Rates

The move by the Bank of Japan earlier this week to step up asset purchases, has caused investors to factor in the likelihood of other nations following suit. For this reason, the Eurozone, which is not expected to use further stimulus measures has remained strong, whilst the Pound and US Dollar continue to suffer. The interest rate decisions by both the Bank of England and European Monetary Union tomorrow may bring volatility. Sterling was trading at the mid-market rate of 1.1469 against the Euro and 1.5898 against the US Dollar at 9.30am this morning.

Pound Sterling – UK Markets

The Pound has risen against the US Dollar since Tuesday with yesterday’s improved services sector data from the UK helping to give Sterling a push. The Euro however is still gaining on the Pound with the hype around whether the UK may be another nation to step up quantitative easing being the dominant factor. Today has seen the results of a survey by the Recruitment and Employment Confederation suggesting a continued weakening in the jobs market. The number of people appointed to permanent jobs in September grew by its slowest pace in twelve months with wage inflation at a ten month low. The REC’s chief executive warned that the jobs market could be heading for its own ‘double-dip’ and that although the private sector has experienced some recovery, the public sector has seen sharp falls only likely to be furthered as budget cuts continue. The latest figures suggest that the jobless rate currently stands at 7.8 percent with 2.47 million people out of work. Investors will now be focusing on tomorrow’s Bank of England interest rate decision.

US Dollar – US Markets

The US Dollar remains at the lowest levels against the Euro for over half a year as speculation increases that the Federal Reserve will join the Bank of Japan in increasing purchases of Government debt to sustain the recovery. Comments by both the New York Federal President and the Federal Governor have increased expectations that additional stimulus will be used. Reports later this week are expected to show that applications for unemployment benefits rose and the jobless rate climbed which will not help the currency. ADP employment figures for the US come out later today as a prelude to Friday’s employment report – markets are bracing themselves for a disappointing figure.

Euro – European Markets

GDP figures from the European Monetary Union for the second quarter have come in this morning to meet the forecasted growth level of 1 percent. This means that GDP is up 1.9 percent year on year. The news that GDP came in to meet expectations and didn’t disappoint, is likely to help maintain the Euro’s current position of strength as GDP is treated as a key indicator on the health of the economy. In contrast increased speculation surrounding the likelihood of new stimulus measures in the UK and US, the European Central Bank is continuing to shorten the duration of its funding programme to the banks and bond markets thereby withdrawing supportt. The Euro has also been supported by yesterday’s positive PMI data from the UK, Europe and US, boosting risk appetite and making investors keener to buy the Euro.

Other Currencies – Highlights

The talk of a ‘currency war’ is still making headlines as various economies attempt to find ways to weaken their currencies and therefore make their exports more competitive in the struggle for recovery. Japan’s decision this week to cut its benchmark interest rate and use stimulus measures, buying 60 billion Dollars worth of assets, has failed to pull down the value of the Yen long term with the Yen gaining against the Dollar over the past twenty four hours. It is thought that Japan will not intervene in the currency markets again this week by buying the US Dollar and selling the Yen due to the upcoming G7 meeting. This meeting of G7 finance ministers and central bankers from the Group of Seven industrialized nations is expected to focus on measures being taken across the globe to weaken currencies and loosen monetary policy from Japan to Brazil to Switzerland. More asset-buying measures from other Central Banks across the globe are widely expected following the moves by the Bank of Japan. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000