Sterling rises as EUR and USD trading fairly flat. All eyes on MPC interest rate decision today

Tom Tong07/Nov/2013Currency Updates

GBP

Another pleasing day for UK stakeholders and investors as we saw the pound gain against the dollar alongside its most traded pairs. However, sterling dropped slightly against the euro. UK industrial output and shop price index both came in higher than expected. Output in the industrial sector, which holds around 1/6th of the UK economy climbed 0.9%. Shop price index also saw gains as consumer sentiment continues to improve and the retail sector expects tills to be roaring all through the festive period.

After solid data earlier this week, UK bulls will be chuffed to see a hat trick for UK data, supporting the view that we are seeing a sustained economic recovery. Increasingly worldwide investors are backing the U.K for long term gains. Naturally, Sterling feeds of such views and is surfing a very strong week from strength in the wider economy, indeed it was only yesterday that we saw service sector PMI hit a 16-year high. Data for Q4 looks rosy and inevitably this leads to the hype over what this means for BOE monetary policy and if an alteration is on the cards. Today the curtain will be partially raised with the lunchtime BOE interest rate and QE decision. Nothing is expected to change with interest rates kept at 0.5% and QE at £375bn. Next week should be a little more illuminating with the spotlight again falling on the BOE. The wide ranging stronger than expected economic data could see the BOE bringing forward its forecast for when unemployment hits 7% thus stimulating a review to when both rates and QE will be altered.

Massive day for sterling, BOE meeting and asset purchase facility due for release at 12.00 GMT.

EUR

Nothing to write home about out of euro trading yesterday. It traded flat against the pound and trading within range against the dollar, although it did end the London session with slight gains. The euro continues to dance over whether the ECB will alter interest rates and monetary policy. Fundamentally the ECB have a trio of main options- cut rates, further use forward guidance or provide more liquidity.

Mario Draghi is a highly respected economist and central banker, last year he piped up and stated the ECB- “will do whatever it takes to save the Euro”. After improved data and wider market sentiment the eurozone is now haunted by a threat it did not anticipate, namely deflation. Inflation in the bloc has been dipping since the middle of year. October’s flash reading of 0.7 showed just how thin the ice is that the market was treading. Overnight whispers over the threat of deflation turned to shouts and all heads turned to the leadership of the ECB. Ultimately there is a danger that falling prices, or even deflation lights the fuse that the periphery debtors will default. Low growth in key areas and the prospect of higher global yields sets the scene for not only a significant slowdown but an emergence of the crisis. Disinflation has hit as the eurozone is shackled by high levels of unemployment with recent euro strength leaning on inflation and making business harder for exporters. To make matters worse, as price pressures have eased the ECB balance sheet has taken a hammering as banks buoyed by ease of liquidity start to repay loans provided to provide a rescue out of recession. This has hit the balance sheet at a time when the ECB wants a solid war chest.

Market speculation is mounting that the ECB may change interest rates and monetary policy today. We have a 50/50 view, if not today the focus will shift to December and then early next, added time will give the ECB the chance to further review data to aid the decision. The curtain lifts at 12.45 GMT with the IR decision, followed by the statement and press conference at 13.45. All eyes on London and Brussels today, central banks very much in the limelight.

USD

Little noise out of the U.S yesterday. Mortgage applications and job cuts were pleasing with the data coming in slightly better than expected. Resulting in the dollar gaining on the euro feeding off market uncertainty over the ECB decision. Trading within resistance levels against Sterling, although overall fairly flat, noises over how much more Sterling will gain against the greenback.

Strong data out of the U.S mirrors the situation in the U.K and stems chatter over whether it will lead to an alteration in QE or monetary policy. The market now looks to the FED meeting to gain a proper insight into sentiment amongst the FED.

Data of note out of the U.S today includes- jobless claims and initial jobless claims, we also have twitter’s IPO on the NYSE with shares now being offered at 50% higher than originally expected.

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Written by Tom Tong

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