Currencies remain in holding pattern as markets focus on central banker speeches this week

The heads of the Bank of England, the Bank of Japan, the Federal Reserve and the ECB central bankers will speak on Tuesday in a policy panel sponsored by the latter institution, with markets likely to scrutinize their statements for clues. US inflation data out on Wednesday should also provide some currency market volatility.

Major currencies in detail

GBP

Industrial production grew much faster in September than economists had expected, driven by a marked increase in manufacturing output. By contrast, construction output disappointed.

The relative strength of Sterling may have as much in common with market expectations for hawkish Bank of England communications this week as it does with the relatively strong data. In addition to Governor Carney’s participation at the ECB panel on Tuesday, three more MPC members will be giving speeches this week. By Friday we should have a much clearer view of whether the dovish read that markets made of the last Bank of England meeting was warranted, and whether the MPC really expects to pause after at most one more hike, as interest rate markets have priced in.

EUR

The European Commission finally caught up with the rest of the market and, unsurprisingly, revised sharply upwards its economic growth forecasts. Retail sales across the Eurozone also rose strongly in September. However, this is no longer news for markets, which have already priced in growth above the 2% level for the next two years.

ECB policy is far more important for currency markets, and recent disappointments in inflation data have made it unlikely that we will see higher rates from the ECB before mid 2019 at the earliest. President Draghi’s statements at Tuesday’s panel should provide clear confirmation of this wait-and-see stance and could be bearish for the common currency.

USD

The complete absence of first tier macroeconomic news out of the US left traders focusing on fate of the Republican tax package that is winding its way through the US Congress. Absent dramatic developments on this front, which are not expected this week, the Dollar will react to two key events. On Tuesday, Chair Yellen will provide further clues about the outlook for interest rates after the widely expected hike in December. On Wednesday consumer inflation data will be released for the month of October. The key number will be the increase in core prices, excluding volatile food and energy components. This numbers has been at 1.7% annualised for the past few months, hence, any increase from that level would provide strong support for the Dollar.