Low Volumes due to veterans day leads to slight euro gains while GBP and USD remain flat

Tom Tong12/Nov/2013Currency Updates

GBP

Across the market we saw a fairly quiet day of trading with volumes low due to holidays in both US and France.

Yesterday sterling fell against the dollar and euro. The pound appears to be scaling back from a 10-month high hit against the euro last week. The dollar experienced increased support following NFP strength last week, leading to improved sentiment for the U.S economic situation. Plenty of data releases for the UK this week could lead to a pivot in the pound. However, with overall market sentiment leaning towards a bullish outlook for the U.K it will have to come in far off market expectations. UK jobs data and inflation report release will be avidly scrutinised. The pound has widely risen across the board over the past few weeks, support centered on the possibility that the consistent release of strong UK data could lead to a tightening of BOE monetary policy.

The inflation report on Wednesday will also reveal growth forecasts, many now expect the BOE to echo the market’s view and scale back their expectations on the timescale, at which they intend to tighten monetary policy. Presently, unemployment needs to hit 7% prior to the BOE considers a tightening of policy and an alteration of interest rates. Right now UK unemployment is 7.7% and interest rates are at a all time low of 0.5%. Any change will further highlight the disparity in outlook for the EU and UK monetary policy. An alteration would bode well for the UK and an increased bullish sentiment for the UK should support sterling.

Ultimately traders will mainly now look towards Wednesday for inflation reports and UK job data.

Notable data out of the UK today includes- Consumer Price Index, Producer Price Index and Retail Price Index.

EUR

Euro pushed higher against both sterling and dollar yesterday. However, gains are relative as last week was a torrid time for the eurozone with the currency crashing against the board. Pressure and uncertainty still remain, following the ECB unexpectedly cutting it’s benchmark interest rate from 0.5% to 0.25%, and warning further rate cuts are possible. The ECB caught the market slipping with many not expecting a cut. The euro duly crashed to a 7-week low against the dollar and a 10-month low against the pound.

Growth expectations for the eurozone have now been slashed and we have seen a significant shift in market sentiment towards the eurozone. The economy continues to be crippled by shockingly high unemployment and inflation still haunts Europe with the prospect of further deflation shackling growth. Perversely the euro is now suffering from the capital flight that had initially given it the props to climb to such highs.

The ECB report next month will provide a greater level of insight into how the eurozone recovery is progressing and growth prospects for next year.

Data releases of note today include- CPI figures for Germany, Italy and Portugal.

USD

Slightly muted day for dollar trading yesterday as the veterans day public holiday meant volumes and volatility were minimal. Dollar was up against sterling although mostly just bouncing around resistance levels and relatively flat and was down against the euro as the currency receives creeping gains following last weeks spectacular lows.

With no data out of the US yesterday the market continues to reflect upon the unexpected oddity of last weeks NFP numbers.120,0000-140,000 were widely called, however, they roared in at 204,000, thus prompting a greenback rally. Naturally, the market is pleased to see signs of US growth, however, the data is slightly warped because the partial government shutdown delayed NFP data gathering. Therefore,the response rate from employers returning NFP data to the government was the highest ever. Such high response levels will always prompt a positive jump in numbers. Ultimately every data release is vital for the US. Right now US monetary policy is wearing golden handcuffs. The key remains US macro data releases. QE is highly unlikely to change prior to consistent solid data releases.The Fed will have the luxury of seeing the November report before the December FOMC meeting, so policymakers do not have to make up their minds based on the October data. Either way the market continues to speculate on when the FED will taper with general consensus now looking towards Q1 next year.

The market will look to talks by Bernanke and Yellen this week to scope for clues on their thoughts over the timescale for QE. Strong NFP has heightened the possibility of an alteration as markets are jumpy. However, even if nothing changes the retort and tone of the meeting could lead to movement.

Redbook chain store sales are due for release today and we also have T-bill auctions.

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Written by Tom Tong

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