Pound Sterling, Euro Tick Along; US Dollar Stronger

Opening the week, there’s been little variation in conversion rates since markets closed at the end of last week. With Pound Sterling slightly up against the US Dollar; the Euro slightly down against the US Dollar; and the Euro slightly up against Pound Sterling. The major economic events of the week ahead are yet to make their forecast mark on foreign exchange.

Exchange rates:

The pound to US dollar exchange rate: 1 GBP converts into 1.6325 USD.
The euro to US dollar exchange rate: 1 EUR converts into 1.2955 USD
The euro to pound exchange rate: 1 EUR converts into 0.7935 GBP.

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GBP Pound: Cautious ahead of Thursday's vote

Pound Sterling tumbled to a 10-month low recently after polls showed the outcome of the vote remains far too close to call.

But today, Pound Sterling was steady near a one-week high ahead of a closely watched referendum on Scottish independence.

The vote will dictate the pound’s performance over the short-term.

Pound Sterling is slightly undervalued versus the Euro, and could decline another 2-3% in the event of a ‘Yes’ result.

However for the year ahead it is still expected, regardless of the referendum result,  that the Euro against the GB Pound will continue to trade lower given divergent monetary policy between the BoE and ECB.

Pound Sterling against the US Dollar may remain subject to heightened volatility ahead of the referendum with a report indicating significant capital outflows in the month of August.

They may attempt to base build within 1.6050-1.6415 ahead of Thursday.

Euro: Lack of positive sentiment

The Euro against the US Dollar exited from the base formation with a potential upward beginning.

Today it fell from its overnight highs but remained well away from its recent 14-month low against the US Dollar.

The clearly divergent policy outlook between the Fed and the ECB should remain a major liability for the Euro, especially if this week’s FOMC meeting sees in any change in language from the Fed.

This month’s surprise monetary easing by the ECB and its announcement of an asset purchase programme to be launched in October was particularly damaging to the Euro.

The OECD cut its forecast for growth in the Eurozone this year to 0.8% from 1.2% in its May assessment.

It also said the ECB needs to do more to support growth in the Eurozone to expand the amount of money in the financial system.

TLTRO risk could trigger another leg lower: if the Targeted Long Term Refinancing Operation (TLTRO) auction is not a success then we could see the Euro start to weaken. 

BNP Paribas notes: "A disappointing uptake could put some upward pressure on EUR rates and the currency, but we think benefit would be very short-lived, with anticipation likely to build that the ECB will be more aggressive in its asset purchase plans. We remain short EURUSD heading into this week”. 

US Dollar: JP Morgan expects Fed rate hikes mid-2015

The US dollar floated around a 14 month trade-weighted high overnight as investors anticipated the busy week ahead.

There are increasing signs that the US Dollar is becoming an ‘asset currency’ as the US simply delivers higher expected returns, whether one invests in equities, bonds or real estate.

FOMC this week, with the Fed’s monetary policy statement, will headline and investors are looking for any changes to the Fed’s statement.

Any hint that rates could begin to rise sooner than previously expected will likely send the US dollar higher.

JP Morgan expects the Fed to drop the "considerable time" guidance from its post-meeting statement.

It also expects the median forecast for the end-2017 Fed Funds target rate will be close to neutral, around 3.50%-3.75%.

"We now expect the Fed to hike rates in June 2015, vs. 3Q15 previously," said JP Morgan.