EUR trading at 6-month low against the USD as inflation figures and unemployment data shock the market

Tom Tong01/Nov/2013Currency Updates

GBP

Sterling rallied yesterday against EUR as the market was taking in the rumours that the ECB were going to make a 25bps refinancing rate in December. Long have we seen the rate being unchanged so this move indicated that the eurozone is not quite at the stage of recovery that it would like. Sterling was also able to maintain the psychological levels against USD.

In terms of data, the UK saw stronger than expected releases with Nationwide HPI report printing a 1.0% increase in house prices for October, 0.7% was widely expected. However, this release coincides with further worries that the UK is seeing a housing bubble rapidly growing. The Bank of England confirmed that consumer credit is rising twice as fast as previously thought, the BoE revised the amount of unsecured loans for September from £411m to a staggering £864m. Clearly the positive data out of the UK over the last months has helped the economy bounce back and consumers have improved confidence. However this isn’t as clear cut as it looks since the continued high inflation means that people are not only borrowing to purchase goods but also to make ends meet while prices soar and wages lag behind.

Later on today we will have the UK manufacturing PMI figures which are expected to show a decline from 56.7 to 56.3 for October. An upward surprise will help sterling maintain its position against the dollar.

EUR

Yesterday there was worrisome news out of Europe. The inflation rate fell to 0.7% annualised, down sharply from an already too low 1.1% in September. Inflation in Spain, Portugal and Ireland is hovering right above 0% and Greece is already deep in deflation. This is bad news for sovereign debt sustainability in these countries over the long term, since it increases the real debt burden. We regard sovereign debt sustainability in Southern Europe as the most serious structural problem in the Eurozone, and these numbers make it more difficult to deal with. We think that there is now a 50% chance that the ECB will cut rates next week, and think that the sharp fall in the Euro against other G10 currencies is fully justified.

Moreover, following poor CPI and employment figures, the euro inevitably suffered significantly, falling against all of its most traded pairs. Notable losses against the dollar as the greenback punches back following its recent losses.The euro traded at its lowest against the dollar in 6 months.

Euro data hit highs of the wrong sort yesterday. A shocking bowling ball of macro data hit a straight strike, sending the currency scuttling to lows and sacrificing the gains seen over the past week. It would appear many had long positions in the currency which were quickly cut following the release of CPI and unemployment figures. The CPI and unemployment figures were most unexpected, eurozone inflation hit a 4 year low clocking in at 0.7% far below expectations. This pushes the rate further from the ECB target of around 2% and will surely cause concern amongst the ECB. Furthermore, the jobless rate added to the drama with the jobless rate for the eurozone rising from 12% – 12.2%

The ECB meet next week to discuss interest rates. It has been divided over cutting rates. In light of this recent data a cut is possible, however the ECB will probably make its move in December when it will have the medium term inflation forecast and a better understanding of the state of the economy.

There is no notable data out of the eurozone today, Germany France and Spain will be on holiday for All saints day.

USD

A good day for the dollar yesterday, trading against sterling was fairly flat and nothing to write home about, the movement was against the euro. The dollar rallied to a 6-month high. Against its most traded basket the dollar is now up, shrugging off the miserable performance over the past few weeks, stemming from the political nonsense, poor data and nervy market sentiment. Furthermore, the dollar gained after Wednesdays FED meeting. They dropped a reference to tightening financial conditions in its post meeting statement, which further encouraged U.S bulls.

The dollar index enjoyed its fifth day of straight gains this is bouncing from last weeks 9-month low and is encouraging for potential future dollar gains. The FED meeting bolstered views that FED could roll back stimulus sooner than thought. In recent weeks expectations have generally been towards March next year, with the FED and market needing to see clear and consistent positive data out of the U.S. Overall U.S growth is starting to pick up although we are still in a fragile period since next February there is the possibility that the debt ceiling crisis may again raise its ugly head causing more drama. All eyes and ears primed for next weeks NFP which will surely bring dollar movement. Data of note out of the U.S today includes – PMI, vehicle sales and we also have various FED members talking.

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Written by Tom Tong

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