Catalonia Vote Shakes Euro
Sterling strengthened to the Euro in the aftermath of Catalonia’s landslide vote for independence in Sunday’s disputed referendum vote. 90% of the 2.26 million Catalans voted for independence from Spain, and hundreds were injured by riot police. Separatists in the Catalan parliament have threatened to declare independence within 48 hours of the vote, despite the fact that Prime Minister Mariano Rajoy deemed the referendum illegal.
The US Dollar benefitted from the political turmoil in Europe, and has started the month strong against the Euro, with expectation that the single market currency will sink further due to the political unrest in Spain. The US currency is also being supported by speculation that President Trump may choose to replace Federal Reserve Chair Janet Yellen with Kevin Walsh. The former Federal Reserve governor is more likely to raise interest rates than Janet Yellen has been.
Pound Sterling – UK Markets
Sterling weakened against the US Dollar today, with the exchange rate set at $1.33. Sterling performed well against the Euro with the exchange rate set at €1.13.
This week, the main data releases affecting the Pound are the series of September Purchasing Manager(PMI) Surveys which calculate the UK’s manufacturing, construction and services sectors. Today’s Markit Manufacturing PMI indicates that UK factories output has slowed down by more than had been expected. The September reading has come in at 55.9, not 56.2, as analysts had predicted. The weaker value of the Pound increased costs for UK factories as it also drove exports to their highest rates in over six years.
Tomorrow’s release of the UK’s Construction PMI is likely to show a cool down in the sector from 51.1 in August to 50.8 in September. The services sector is expected to continue unchanged with a reading of 53.2 when it is released on Wednesday.
The Pound’s weakness contributed to Monarch Airlines suddenly going into administration, affecting around
110,000 customers who are currently overseas. The government has asked the CAA to charter over 30 aircrafts to bring back travellers who had booked flights with Monarch. Over 3,000 staff and travellers who have scheduled future flights face uncertainty ahead. The UK’s fifth biggest airline struggled to earn a profit after the currency weakened due to Brexit, something which contributed to a reduction in UK travellers.
US Dollar – US Markets
The US Dollar rallied against the Euro with the exchange rate set at €0.85. The US Dollar Index (DXY) is up, coming in at 93.56.
The US ISM manufacturing index is due out today and it is broadly expected to increase to around 60, which could further strengthen the Dollar. US inflation data released Friday shows that core inflation fell short of expectation, coming in at an annual rate of 1.3%, which is down from the previous figure of 1.4%. This isn’t likely to alter the Federal Reserve from increasing the interest rates in the near future, however.
President Trump is expected to choose two nominees for Federal Reserve Chair, with the market speculating that former Federal governor Kevin Walsh may replace the current Chair Janet Yellen. The US President has said that he will decide in three weeks whether re will reappoint Yellen, or replace her. Walsh is considered more hawkish on policy than Yellen, which would likely mean a faster increase in US interest rates in future.
Euro – European Markets
The Euro slipped against the US Dollar with the exchange rate set at €1.17. It rose slightly against the Pound, trading at €0.88.
The violent clashes which occurred on Sunday when Spanish police tried to block Catalonian referendum voting have given way to strikes by labour unions and calls for independence as Spain faces its largest constitutional crisis in 40 years. The political turmoil is not yet seen as a threat to the stability of the Eurozone, so unless the situation escalates, analysts don’t expect the single market currency to fall further. Since the Spanish constitution does not allow for the country to divide, it remains difficult for Catalonia to legally become independent from Spain. Prime Minister Mariano Rajoy, who is heading a minority government, has said Catalans were fooled into taking part in an illegal vote.
The Eurozone’s Markit Manufacturing PMI for September was the best reading in over six years, at 58.1.
Germany’s Manufacturing PMI shows that sector is strong, with a reading of 60.6, which marked a 77-month high. The French Manufacturing PMI surpassed expectation, coming in at 56.1, rather than the 56.0 reading anticipated which was also a 77-month high. Greek factories had the best growth in the Eurozone, hitting their fastest rate of growth in nearly a decade.
The European Central Bank will be cautious about tapering their Quantative Easing programme after Friday’s release showed that Eurozone core inflation fell from 1.2% to 1.1%. Economists had expected September’s inflation to rise by 1.6%, but it remained at 1.5%, the same rate as it was in August.
Other Currencies – Highlights
The Pound fell against the Australian Dollar, with the exchange rate at 1.70 AUD. The Aussie is weak against all major currencies, including the US Dollar, with the exchange rate at 0.78 AUD. Australia’s currency is unlikely to regain the strength it enjoyed earlier in the year, since the prices of iron ore, a vital export, are expected to remain low for the rest of this year. A Commonwealth bank analyst predicted the Australian to US Dollar rate “will continue to be guided by the performance of the iron ore prices and the USD.”
The Pound rose against the New Zealand Dollar, trading at 1.85 NZD. The New Zealand Dollar weakened against the US Dollar, down to US $0.71. The Kiwi, like the Australian Dollar, fell on Friday. Both currencies had their worst performing week since April and Kiwi fared slightly worse with a loss of 1.6% last week. Paul Dales, chief economist at Capital Economics expects that the Reserve Bank of New Zealand’s decision not to raise interest rates until the end of 2019 will “weaken the New Zealand Dollar below US $0.70.”
Sterling slid against the Japanese Yen, trading at ¥150.11 The Yen took a tumble against its major counterparts following a Bank of Japan (BoJ) opinions report from the September rate decision meeting. Among the topics members raised was the concern that “more easing was necessary to stimulate demand.” Data released showed that household spending increased by 0.6%, failing to reach the expected 0.9% rate of growth. Japan is due to increase sales taxes in October 2019, which could further dampen future spending.