Dollar gains ahead of FOMC meeting whereas sterling drops against both EUR and USD

Tom Tong30/Oct/2013Currency Updates

GBP

Sterling slid to a 2-month low against the euro yesterday and also suffered against the dollar, spiraling to a 12-day low. The sudden demise in sterling strength follows tentative whispers that the economy is perhaps not as buoyant as past thought. Conversely the remarkable run of euro strength means gains are difficult as the market is so widely bullish towards further euro strength. The dollar having hit the gutter in the past few weeks also means that slight gains for the greenback are fairly easy. Sterling’s broad losses edged the pound’s trade weighted index to an 8-week low.

The pound’s selling pressure stemmed partially from an unexpected fall in retail sales growth on Monday which went against market expectations. Conversely, recent strong rises in U.K house prices combined with strong labour market data had led many investors to bring forward expectations on when the BOE will raise interest rates. Although these have since been revised the market is still calling for a rate change far sooner than the BOE. Overall U.K data is still strong and excluding minor slips, if this run continues we may see U.K economy growth of 3.0% next year. GDP figures last week estimated that the economy expanded by 0.8% in the third quarter the fastest pace since 2010. Consumers seem to agree with the Nielsen consumer confidence survey today being at its highest since 2007. With consumer confidence a whisker above pre-crisis levels this bodes well for the recovery in the UK. Many attribute the recovery to a rise in house prices with the BOE governor yesterday agreeing with this viewpoint, soaring house prices make householders feel more confident and thus spend more, equally more first time buyers has a ripple effect for the wider economy, U.K mortgage approvals have hit a 5-year peak. Some though are concerned that the situation is beginning to look like a housing bubble, however the BOE and government disagree and stress they are carefully monitoring the situation. The market will now look for further data releases to indicate the wider health of the U.K economy, with sterling moving accordingly.

There is no key data of note out of the U.K today.

EUR

The euro continues to trade incredibly well across the board. Yesterday we saw it hit a 2-month high against the pound. However the dollar began to bounce back from its lows and enjoyed gains against the euro. Right now euro highs have fed from the widespread belief that the eurozone has emerged from recession and has a good platform upon which to grow. Equally the euro is supported from strong forward guidance via the central bank and the market is well aware of indicators that will trigger any future moves. Also yesterday an ECB member stated he saw no tool the central bank could deploy against a strong currency, perversely this produced movement in the euro’s favour. Importantly the euro has now broke through an important resistance level against sterling, priming the possibility of further gains. The 200-day Moving Average being breached will only increase euro bulls, upon the average breaking yesterday we saw quick sprees of euro buyers, the market will now dance from two tunes – macro data out of the eurozone week and the FOMC meeting.

The euro’s 2 year high is causing some head scratching at the ECB. There is some disagreement over how best to respond. The chief concern is that subdued inflation will slow further and a steady but fragile recovery may splutter.The 1.1% inflation is running significantly below the ECB target of just under 2%, further rises could further depress prices making it a bigger issue for ECB bankers. Ultimately it’s at the mercy of dollar performance. With markets calling the FED to look to delay its bond buying program next year the euro has leveraged the uncertainty massively to its advantage, the U.S debacle coupled with strong eurozone data has catapulted it 7% over the past quarter. However, the rises are not only restricted to the greenback, across the board on a trade weighted basis the euro is sat at its highest level in almost 2 years.

Plenty notable data releases of note of the E.U today include- Spanish GDP, German unemployment and CPI, Eurozone consumer confidence, economic sentiment and Industrial confidence.

USD

After being on the ropes for the past few weeks we saw the beginning of the dollar fightback yesterday with the greenback scalping gains against both sterling and the euro. Although these gains were mild they are important for market sentiment. Many anticipate the FED to not taper till March next year this will be revealed at today’s FOMC meeting. This evening following the FOMC meeting will bring a statement from the FED following their meeting over the past 2 days. The statements are likely to produce little surprises with the focus will more so be on the tone of the statements. Any drastic alteration of QE at this stage is unlikely since we are still some way from the barometers that the FED has indicated will initiate a change, more importantly the data out of the U.S has been variable at best, a pullback in QE needs to be done in full faith that clear and consistent data has been released and understood by the market.

Dollar rises yesterday were fueled by a whole host of data releases which although varied paint a relatively encouraging picture on U.S growth and response to the partial shutdown. Consumer confidence fell slightly, however this is most probably due to the partial shutdown and consumer confidence for thanksgiving is expected to be strong. Retail sales fell slightly -0.1% however these are also likely to see a big upswing over the festive season. Conversely core retail sales actually rose by 0.3%. Overall core sales continue to rise and the home price index rose as well. However, we see a slowdown at present in the U.S housing market as the market reacts to higher rates.

Eyes and ears today will be locked onto the FED. Any changes in their approach is unlikely as agreement is fairly universal over monetary policy; the focus will be on any rogue comments or signs of disparity between members. Key data will be released out of the US today with employment change and mortgage applications, both expected to be fairly flat.

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Written by Tom Tong

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