BOE happy with labour market performance as QE and interest rates held.

Tom Tong24/Oct/2013Currency Updates

GBP

Sterling continued its ascent against the dollar and remains a whisker from the monthly highs hit last Friday. Trading against the Euro was relatively flat. This morning we have seen a further peak of Sterling against the Dollar with traders doubting the strength of U.S data due to drop today.

Yesterday provided the release of the BOE meetings which was a welcome opportunity for the market to peek into the thought of the Senior BOE officials. The current approach to QE is universal, the 9 man MPC agreed to hold its policy of 0.5 interest rates, with QE held at £375B. Furthermore the BOE stated that the labour market is picking up faster than anticipated with increased growth prospects for the U.K economy envisaged. This stance heightens the market chatter concerning the realistic time-scale for the altering of interest rates and QE. Many now feel change will inevitably come far sooner than the BOE projects. Overall the news continues to display a solid recovery for the U.K economy with confidence across the board appearing to be rising.

Today will see Mark Carney addressing the market and fielding questions, no data releases of note.

EUR

The Euro continues to bully the dollar, it is now a touch away from a 25 month high against the Dollar, upon markets opening this morning we have seen an immediate spike, traders clearly bullish that today will be another miserable day for the greenback. Trading against the pound was fairly flat, with strong U.K and Eurozone data and the Euro trading at unusual highs it would appear the cross is now jousting within resistance levels. The onset of further data for both nations will surely lead to further movement, however right now nothing to write home about.

Interestingly yesterday we again saw the emergence of the ECB lead by the cool head of Draghi. At the last ECB meeting we saw Draghi stress that although encouraging he still feels the Eurozone recovery is fragile. This view was put into practice yesterday. The ECB evidently still feels the economic crisis is far from over. They have called the 17 governments in the single currency to line up cash for potential bank rescues next year after it finishes carrying out its health check on the 128 largest lenders in the Eurozone. The purpose of this exercise is to ensure that there is now shortfall in lending accounts and that all loans can be repaid in full, the last thing anyone wants is a repeat of the crisis which was punished by companies, nations and citizens unable to repay debts. The ECB wants a bailout fund for the entire EU, realistically this is unlikely and we will probably see a banking union for only the Eurozone currencies. Germany the darling of the E.U is still silently seething from having to stump up the cash for multiple bailouts. Today’s will see the ECB members meet in Brussels and Germany is determined to leverage their power to ensure they are not put in a position where they have to finance further bailouts. They are definitely in a strong position to negotiate. Yesterday Germany revised its bullish forecast for growth amid the prospect for record levels of employment. Germany expects GDP to expand 1.7% next year, 1.6% was previously called. Clearly the German economy is on stable course for growth.

Across the board Eurozone data is mirroring Germany’s belief in further growth, however caveats still remain. The blocs economy emerged from its longest recession earlier this year, stemming mainly from- expanding factory output, increased exports and improved consumer sentiment. The issue remains the level of unemployment, presently 12% across the bloc with peaks for the weaker nations sat around 25%. Structural unemployment is the biggest challenge for the Eurozone, quite simply it needs to continue dropping and gain speed.

Data releases of note today include- unemployment numbers for Germany and Spain, Manufacturing PMI. We also have the ECB meeting in Brussels.

USD

The dollar continues to sustain a beating. It continues to trade at a 24 month low against the Euro and is hovering near a monthly low against the pound. The economic effects of the shut-down combined with poor NFP have created a potent mix of poison for the outlook on the dollar and U.S stocks. NFP dropped at 148k with 160-180k widely called. This is at a time when the participation rate for the labor market is at its lowest levels since 1986. Practically meaning that although unemployment is dropping we can not clearly compare previous employment data with the likely growth prospects for the economy, although unemployment is dropping overall we have less people working meaning less liquidity in the economy and less dollars being spent.

The US Federal reserve is still licking wounds from the government shut-down. Therefore the October meeting of the Federal reserve will most likely involve lots of noise with little action. Altering QE is simply not on the cards, the economy is far too tender as is market confidence. Several officials on the Fed are tempted to reduce asset purchases presently at $85B monthly tied to a desired 2% medium term inflation goal and 7% unemployment levels. There is a scarcity of evidence to display to the Fed that this is on target, it will probably take a few months to collect enough evidence to support a slowing of asset purchases. Resulting in a situation right now where the Fed is handcuffed to proper data releases displaying clear and quantifiable levels of recovery. Ultimately the Fed wants to see progress towards an improvement in the labor market so that a taper too early will not throw the market into dissaray.

Big Data releases of note out of the U.S today include- continuing and initial job claims, new home sales, Kansas fed manufacturing survey.

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Written by Tom Tong

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