China Fears Shade Global Growth Expectations

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Yesterday was, as we expected, a quiet day with a lot of liquidity off the table courtesy of the Independence Day holiday. As traders have come back into the market through the Asian session however we have seen these levels increase however and return to a more normal state. Unfortunately that state is one of risk-off with equity markets lower this morning and the dollar gaining ground. There are few reasons for this move lower however some are putting it down to the fact that we have had 6 continuous days higher and there must be a point at which the buying becomes tired; that point seems to be now.

The fundamental reasons are mainly on continual fears of tightening monetary policy and slower growth in China with papers suggesting a rate rise may happen this weekend. There are also suggestions that the size of toxic loans to local and regional Chinese governments may be larger than expected with ratings agencies aiming to get to the bottom of the problem. This has sent GBPUSD and EURUSD lower overnight and while we expect EUR to remain strong on the back of the expectations of an ECB rate hike tomorrow it doesn’t look like we are able to say the same about GBP.

The terrible time that retailers are having at the moment, alongside falls in consumer confidence and real wages, makes it unlikely that today’s Services PMI will be anything to shout about. While the markets are still predicting expansion i.e. a number above 50.0, the magnitude of that expansion has dipped since the upwards blip caused by the Royal wedding and the associated bank holidays. If the reading is really poor then it could be the catalyst for GBPEUR to retrace below the 1.10 level. The expected reading is 53.5 with World First plumping for 53.2; it is due out at 09.30.

Other than the PMIs from Europe and the UK we also have European retail sales at 10am which could be the thing to upset the euro’s apple cart this morning. Recent indicators of euro area domestic demand have been weak and we expect that the high inflation levels coupled with fears over Greece will have kept hands in pockets in the past month and that retail sales will dip more than the 1% that is expected.

This is my last update for a week or so as I am off on holiday tomorrow so my colleague Joe will be taking over while. Me nice to him and I will see you when I’m back.

Indicative Rates Sell Buy
GBPEUR 1.1051 1.1077
GBPUSD 1.5990 1.6017
EURUSD 1.4455 1.4477
GBPJPY 129.73 130.00
GBPAUD 1.4974 1.5002
GBPNZD 1.9315 1.9346
GBPCAD 1.5393 1.5422
NZDUSD 0.8270 0.8390
GBPZAR 10.77 10.82
USDZAR 6.7322 6.7619
GBPPLN 4.3517 4.3784
EURJPY 117.23 117.49

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China Fears Shade Global Growth Expectations

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