The US economy has shown its resilience in times of distress, as the dollar gained dramatically for the last couple of weeks against major counterparts, aided by strong data from the economy, while escalating geopolitical risks are taking their toll on the euro and Sterling Pound. Pressured by worsening economic situations weighed on by the Ukrainian crisis, the European Central Bank surprised the markets by cutting the interest rate to a new record low of 0.05 percent, causing dramatic changes in FX and bond markets.
The euro started the week at 1.3132, range trading ahead of an anticipated announcement of the ECB. The single currency dropped slightly as political tensions escalate after a new proposition of new sanctions against Russia, falling to 1.3110. The euro regained its losses, touching a high of 1.3160, after Russian President Vladimir Putin and his Ukrainian counterpart Petro Poroshenko agreed on steps toward a cease-fire in Ukraine’s easternmost regions. The euro then collapsed following the European Central Bank’s interest rate cut, triggering a sell off, as investors seek the safety of the greenback. The collapsed of the euro was translated to a major gain of the dollar against all major currencies. The euro continued to drop during the press conference, as the market reception of Draghi’s statement was not absorbed easily. The euro broke the 1.3000, a level last seen a year ago, touching a low of 1.2920. The single currency ended the week at 1.2956.
The Sterling Pound opened at 1.6598, rising slightly to touch a high of 1.6644. The Pound then erased its gains, as the country’s manufacturing slowed more than expected, sending fear that the British economy might still be fragile, falling to 1.6450. Cable continued to fall against the US Dollar, after the ECB’s decision to cut the benchmark interest rate, pushing the dollar higher against the GBP. The Sterling Pound collapsed, touching a low of 1.6283, as the dollar continued its momentum, and mixed economic UK data sent uncertainty in the market to spike. The Pound ended the week at 1.6326.
The Japanese yen opened the week at 104.09, weakening massively during the week against a stronger US Dollar. The Japanese Yen continued to drop against the dollar amid speculation that Japan’s Prime Minister, Shinzo Abe, will appoint an ally to head the ministry in charge of reforming the Government Pension Investment fund, the world’s largest pool of retirement saving ($1.2 trillion). The Japanese Yen touched a high of 105.71, the weakest since October 2008, with the USD gaining dramatically against all currencies. The JPY regained some if its losses, ending the week at 105.07.
The Service industry in the United States rose more than forecasted in July at fastest pace in 9-years. The Institute of Supply Management non-manufacturing index rose to 59.6, the highest since August 2005. The figure came higher than the forecasted 57.3, and higher than the previous months’ figure of 56. The increase signals that the US economy is stepping up its pace. Retailers and construction firms expanded significantly, generating more jobs for Americans, pointing to greater momentum in the economy in the second half of the year.
The US trade deficit unexpectedly shrank by 0.6 percent in July to $40.5bn, the lowest in 6-months while analysts were expecting the deficit to shrink to $42.5bn, driven by an increase of exports to record highs.
Number of Americans filing for unemployment benefits rose only slightly last week, as an improving economy encouraged business to keep staff to meet consumer demands. Jobless claims rose by 4,000 to 302,000, against a forecasted rise to 300,000. The total number of people on benefits rolls fell to the lowest level in 7-years.
The European Central Bank unexpectedly cut its benchmark interest rate to spur economic growth in the region, and hinder inflation. The ECB’s 24-member governing council reduced its benchmark interest rates by 10 basis point, to 0.05 percent, while the deposit rate is now -0.2 percent, and the marginal lending facility at 0.3 percent. The rate cut came 3-months after a historic package of stimulus measures. ECB President Mario Draghi’s plan to buy asset-backed securities and covered bonds pushed the Euro below $1.30 for the first time since July 2013, after stating that “the inflation outlook had worsened”. Draghi added that “the ECB will purchase a broad portfolio of simple and transparent securities” and that the ECB “took into account the overall subdued outlook for inflation, the weakening in the growth momentum in the recent past” Draghi said.
The manufacturing sector unexpectedly slowed more than forecasted last month. The Manufacturing Purchasing Managers’ Index’s (PMI) dropped significantly to 52.5 from 54.8, the lowest level since June 2013. The PMI fell below economists’ expectation of 55.1. The weakness in the Euro area is taking its toll on the British economy, showing that the UK economy is not immune to the global market uncertainty and the impacts of rising geopolitical risks.
The United Kingdoms’ Construction Purchasing Managers’ index grew at its fastest pace in 7-months in August, improving job creation, but also accumulating tensions on suppliers. The Purchasing Managers Index rose to 64.0, from last months’ 62.4, exceeding economist expectations of 59.1. A reading above 50 indicates expansion, and below 50 represents contraction. The expansion came from housing, commercial and civil engineering markets.
After a big hit from the last financial crisis, UK construction only began to grow strongly last year with the aid of an economic recovery and low interest rates. Although the hike in housing construction is solid, it is still short of meeting the market demand, that prompted the Bank of England to state that “the risks from the housing market pose the biggest threat to the country’s economic recovery”.
The Peninsula
