Currencies: What's in store this week?
Peter Theuninck, currency analyst at Baydonhillfx, looks ahead to this week's major events affecting the pound, euro and dollar in currency markets.
**Pound**
Comments from the Bank of England saw markets scaling back their expectations of an increase in the UK central bank's asset purchase program at the end of February, but the possibility of such action is still widely expected. To that end economic fundamentals will be closely watched to see if there is any cause for concern regarding a continued softening of the British economy.
Key focus for the pound will be on the release of the various purchasing managers' indices (PMI), the PMI manufacturing index being the most important of these releases. UK manufacturing activity has been forecast to show an improvement, with the sector moving back into expansion territory. Analysts are only forecasting a slight improvement and while one can expect such a release to be positive for sterling, the effect are likely to be short term.
Market participants will certainly be looking at the data in context of trends for the UK economy, but the figures are unlikely to significantly reduce expectations that further stimulus measures will be introduced in February.
Uncertainty surrounding the European debt crisis will still be a factor to consider as it plays on investor sentiment. Markets were disappointed at the onset of this week after it was confirmed Greece had still not reached an agreement with private investors on a debt swap. Any movements towards increase demand for safe-haven currencies such as the dollar would likely have a detrimental effect on the value of the pound.
**Euro**
German CPI inflation figures showed consumer price pressures in Europe's largest economy ease in line with expectations, which leaves the European Central Bank in a stronger position to keep monetary policy on hold.
Retail sales and PMI manufacturing data from Germany will be the main focus for fundamentals from the eurozone and the data is expected to indicate stable economic activity. This leaves only the ongoing debt problems within the EU as a potential negative factor for the single currency.
Greece has yet to reach an agreement over private investors taking a write-down on Greek bonds and the EU and International Monetary Fund (IMF) is again putting pressure on the Greek government to introduce further austerity measures in order to secure the next round of bail-out funds.
This leaves investors quite nervous and after two weeks of gains the euro is more likely than not to weaken against the US dollar.
Speculators cannot be ignored though, as we saw last week, short-term profit-taking trends set off by economic data events are likely to again introduce a great deal of volatility to currency markets.
**Dollar**
The main focus this week for the dollar will be the jobs sector, with the ADP employment report and the non-farm payroll numbers being released on Wednesday and Friday respectively.
In addition to the main employment data releases we also have the weekly jobless claims numbers to look at. Last week's figures were slightly weaker on the headline release, but the overall trend in data remained positive. Analysts will be keen to see if the positive trends seen so far continue and should this be the case, the dollar will continue to be seen as a safe bet for investors looking to limit their risk exposure.
The final data release to keep an eye out for will be the release of the ISM non-manufacturing index. Activity within the US service sector is expected to have increased for the month of January, further strengthening the US dollar's safe-haven status.
Speaking of safe-haven flows, debt events in Europe and their effect on the single currency will again continue to have a knock-on effect to movements in the dollar.
