Pound and Euro React to Fresh Chinese Economic Concerns

Today, the Euro and Pound Sterling pairing (EUR/GBP) is showing gains to advance to 0.7357 after last week’s ups and downs due to China’s devaluations and stock market plunge.

Foreign exchange markes are reacting to news that manufacturing activity in China contracted at its fastest pace in three years in August.

The markets have reacted notably with the benchmark Shanghai Composite share index falling by 2% to 3,142.14.

The Australian, Canadian and New Zealand dollars have all fallen as they have  a higher exposure to the Chinese economy than other G10 rivals.

This has trigged demand for the euro as the euro has in the past been used as the funding currency to buy exposure to the AUD, CAD and NZD.

Now that demand for these ‘commodity currencies’ is declining investors will be selling and buying back euros, thus driving demand for the shared currency.

The entire euro exchange rate complex is higher.

The GBP performed poorly against the rallying commodity and emerging-market currencies over recent days on the back of stabilisation in China.

Gains are now being realised as risk grows once more.  

The EUR stands to gain significantly over the GBP if the Euro Zone annual inflation rate results come in higher that the forecasted register of a 0.1% increase y/y. In July, consumer price growth in the euro zone reached a 0.2% annual level.

Also, Germany will publish the results of retail sales in July with a 1.3% gain forecast on a monthly basis, following the 2.3% decline in June, and a 1.5% hike annually after advancing 5.1% y/y a month ago.

The focus will also be on the Mario Draghi, the President of The European Central Bank (ECB) and his monetary policy team as they convene in Frankfurt this week.

In the UK, releases on Mortgage Approvals, Consumer Credit and Markit’s Manufacturing PMI will be other determining factors in the EUR/GBP exchange rate. However, due to the bank holiday, no economic data will be released today. Consequently, the GBP is not expected to rise against the EUR.  

The markets are also taking in the statements from the heads of the world’s central banks at the Jackson Hole Economic Policy Symposium in the US.

Both the representative heads of ECB and the Bank of England (BoE) stated their regions and markets are prepared and ready for a US rate hike in September of this year.

However, in their statements to delegates, both heads cautiously speculated that inflation is still a problem in their respective regions; that current headwinds could mean shorter-term inflation comes up short, making it harder to meet their forecasts.