We expect the Sterling and the Euro to be under pressure during the week, ahead of the crucial Bank of England (BoE) and the European Central Bank (ECB) rate meetings later in the week.
We anticipate the BoE to hold interest rates, but markets are looking at hints about the timing of the further stimulus in its rate setting meeting on Thursday.
We expect the GBPUSD pair to be volatile amid uncertainty over the additional BoE stimulus.
Additionally, lack of clarity about the outcome of the ECB’s interest rate decision, following high inflation in the Euro-zone, is expected to weigh on the Euro.
The persisting concerns about the debt crisis in Greece would continue to put pressure on the Euro. Between the Euro and the Sterling, we believe that the Euro will come under greater pressure.
Pound Sterling – UK Markets
The Sterling weakened against the US Dollar, amid market expectations that a report scheduled for release today, would indicate that manufacturing activity in the U.K. shrank in September.
The selling pressure in the currency is likely to continue for few more sessions, ahead of the Bank of England’s interest rate and asset purchase decision scheduled on 6 October 2011.
The central bank’s minutes from the last meeting, indicating an increased probability of another round of government bond purchases to shore up the economy, continues to dent investor sentiment.
However, we expect the Sterling to extend gains against the Euro, as investors increasingly look towards British assets as relatively stable alternative to those of its European counterparts.
US Dollar – US Markets
The US Dollar has registered gains this morning, as mounting concerns over the European debt crisis has spurred investor reliance on safe haven assets.
Additionally, a decline in Asian and European equity markets has increased risk aversion amongst traders.
We expect the US Dollar to gain further, as there seems no immediate respite to the current debt crisis in the Euro-zone.
Moreover, we suspect that continuing downbeat economic data from major nations would provide further strength to the currency.
Market awaits the US ISM manufacturing report scheduled later today, which is expected to show that the sector maintained its levels in September.
Euro – European Markets
The Euro dipped to nearly an eight-month low level against the US Dollar, and is expected to continue its journey southwards, amid reports that Greece would miss its 2011 and 2012 budget deficit targets set by the European Union and the International Monetary Fund.
Our outlook on the Euro remains bearish, as doubts persist over the next plans to tackle the Euro-zone debt crisis.
The debt crisis situation in the region has been aggravated by a statement from the German finance minister, who ruled out the country’s higher contribution to the Euro-zone rescue fund beyond an already approved plan.
Markets are keenly awaiting the outcome of the Euro-zone finance ministers meeting in Luxembourg later today.
On Friday, the Euro declined against most of the major currencies, following weak German retail sales in August.
Other Currencies – Highlights
The NZD has extended its Friday’s looses against the US Dollar and is trading marginally lower, amid worries over the global economic outlook. A drop in Australia’s PMI this morning has not been positive for the region.
The currency has continued to be under pressure, after the S&P and Fitch downgraded New Zealand’s government debt rating on Friday, citing its worsening external-debt position and the costs of earthquake recovery.
We expect further losses for the NZD/USD pair during the coming period, as persistent concerns over the global recovery has increased demand for the US dollar and has pushed the pair lower.
The JPY has strengthened against the US Dollar, after the Bank of Japan's quarterly Tankan survey report revealed that large manufacturers expect improvement in the business conditions in the next three months.