Janet Yellen appointed as FED Chairman lead to extending USD gains whereas GBP suffers from poor data released

Tom Tong10/Oct/2013Currency Updates

GBP

Sterling was not in a celebratory mood yesterday as considerably weaker than anticipated data was released, spoiling the party we have seen over recent weeks. Sterling dipped to a 2-week low against the greenback and was a whisker from the last weeks 1-month lows against the euro. The weak data led to a minor sell off as traders chose to take gains accumulated over the previous weeks. British Industrial output decreased in stark contrast to recent private sector surveys that fuelled anticipation of further gains. The trade deficit was also bigger than expected.

The market expected to see industrial output increase 0.4%, however we saw a fall of 1.1%. Office of National Statistics data showed the U.K’s net trade deficit was £3.3bn in August, a minimal rise from the £3.4bn in July. The deficit in trade in British goods despite decreasing only slightly was still worse than expected. Presently the U.K is importing £9.6bn more than exporting. Fortunately a surplus in the services sector reduced the net deficit to £3.3bn. Factory output took a hit of 1.1% the biggest fall since September 2012, disappointing after rising 0.1% in July.

Perversely the change in sterling’s fortunes reflects positively on the BOE. Prior to today’s poor data we have seen a stampede of positive data out of the U.K which has prompted many investors to price in a rate hike far earlier than the BOE timeline. The BOE timeline is saying towards the end of 2016. The bullish market sentiment was calling far sooner. This data changed that and investors are now pricing in a rate move in 2 years compared with 18 months a few weeks ago.

The BOE began its two day meeting, however the eventual minute release is not expected to show anything unexpected with the BOE universally wishing to leave policy unchanged. More weak data will cause further sterling weakness, however drastic movement is unlikely with resistance levels taking on increased significance. Equally the U.S is still in crisis which directly supports sterling.

The BOE will release its interest rate decision today, no change is almost a certainty, therefore leaving rates at 0.5%. The BOE is also likely to touch on markets conditions and express thoughts on QE.

EUR

Impressive data out of Germany caused the euro to enjoy slight gains against sterling. The euro was down against the greenback following Janet Yellens appointment as FED chair and the release of positive FOMC minutes. As the market digested this news we saw a wave of dollar buying.

German capital goods displayed stronger than expected gains. Output jumped 1.4%, 1% was called so the rise was notable. Overall output was also up 0.7%. The German ministry was pleased as Germany has shown weaker than anticipated industrial figures over the past quarter so this jump of data is most welcome. More so when it reflects so accurately on the overall health of the German economy. It also negates fears that a German slowdown was ensuing. The markets confidence in Germany is critical. As Europes largest economy they are used as a thermometer for the wider economic situation for the entire eurozone. Angela Merkel also carries immense weight in eurozone dealings with world leaders and her views are well valued and respected.

Germany’s economy roared ahead during the early years of the eurozone crisis, however growth reduced last year, economists generally expect slower growth this year as it retraces to more normal levels.

Data release of note in the eurozone today includes Italian industrial output, Greek Industrial Production and Portugal’s consumer price index. This will be heavily scrutinised as they are weaker eurozone economies and the market is keen to ascertain that euro growth is widespread and not predominately restricted to the stronger members. Mario Draghi will also be talking in the afternoon.

USD

The USD grabbed a much needed jump yesterday. The greenback found some much needed support and moved higher across the board. This followed Janet Yellen’s appointment as FED chair being approved by the Senate and officially announced by the White House. The release of minutes from Septembers FOMC meeting showed that most members still expect tapering this year.

The Dollar bounced up against sterling taking leverage from poor U.K industrial production data casting doubts over the net growth for the U.K in Q4 and reversing the stampede of positive data over the past months. The dollar rally coupled from Yellen’s nomination and encouraging minutes from the FOMC meeting.

The dollar also strengthened against the euro shrugging off positive German industrial output figures.

Yellen’s nomination came as little surprise. The only real contender Larry Summers had to drop out following the House Of Representatives being unimpressed with his contention for the role and making plenty of negative noises. The last thing Obama wanted was a battle to appoint a new Chair, especially with the current disastrous political situation. Although, she is little known in the public eye, her economical views are well broadcast. Presently she is ultra dovish but her stance could change if the U.S recovery runs quicker than expected although for the meantime U.S monetary policy will experience minimal change.

The dollar extended gains later in the session after the release of the FOMC minutes, this showed most members expect there to be a scale back in QE this year. Mid-afternoon New York trading saw a wave of dollar buying and the greenback spiking against its most traded pairs. Although slowing, we saw this trend continue overnight.

U.S Jobless claims will be released today. We also have a 30-year bond auction and a FED member talking.

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Written by Tom Tong

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