Slight Euro gains as markets focus on UK growth and CPI

Tom Tong13/Nov/2013Currency Updates

GBP

Minimal excitement for the UK yesterday as the carousel of euphoria towards the march of economic recovery we saw over recent weeks has since slightly scaled back. Sterling slipped to an initial 2-month low against the greenback before fighting back. Ground also lost against the euro. Losses stemmed from weaker than forecast inflation data pushing back sterling bulls. More importantly they alter market expectations as to when the BOE will lift interest rates. Upon UK unemployment hitting 7% the market expects the BOE to begin a pullback on QE and a rise in interest rates. Indeed the BOE has often reinforced this view, however stating caveats still remain although the 7% target will probably lead to action. Hence the microscope is on UK data.

UK CPI dropped to an annual rate of 2.2%. 2.5% was widely called so the margin was notable, the slide was the biggest in 13-months and provides the BOE with more levy to justify their current market expectations. Perhaps the market had overextended its view on UK growth. Many had long positions which were cut, further enhancing the slump. Sterling stays in the limelight today, with focus on shifting to the release of quarterly growth and inflation forecasts. Further important data will be average U.K annual wage and claimant count rate. All will face heavy scrutiny, the market is widely bullish towards U.K growth and will want yesterdays surprise of poor CPI soothed by reassuring macro data today. Set to be an eventful day for Sterling.

EUR

The euro gained on both sterling and the dollar yesterday as it tentatively begins to claw back minor losses after the record lows seen last week following the ECB interest rates cut.

After last weeks deafening response to the Euro rate cut this weeks response has been surprisingly muted. With volumes down it would appear many are unwilling to place large positions prior to important macro data due this week. Right now any macro release is scrutinised more than ever, put simply you have the ECB, FED and BOE all scratching their heads over how best to treat monetary policy. Uncertainty fuels volatility and over the past few weeks this has been perfectly demonstrated, with data coming in offside leading to movement.

Naturally after last weeks spectacular lows the euro is beginning to retrace. However gains are mostly bouncing between resistance levels. Political developments were notable in the eurozone yesterday, Germany is the undisputed leader of the eurozone, not only exhibiting the swiftest recovery but also displaying the strongest signs for long term growth. The Germans are still in negotiation over the formation of a coalition party. Europe is a key topic of contention. Controversially, a policy group yesterday called for referendums when new members join Europe. This shift could easily lead to an erosion of Germany’s power to react in a crisis, as it has done well over the economic crisis. The policy is unlikely to ever come to fruition. However it highlights the disparity between German political standing to Europe. Importantly the eurozone yesterday finally agreed a fresh budget for 2014. Following lengthy negotiations the budget will cut spending 6% with extra funds injected into fighting soaring youth unemployment which at 24.5% overall is a major cause of concern and long term growth plans. The employment gap between stronger and weaker nations is startling and is a unfortunate example of the difference in recovery success the bloc is experiencing- Germany has the lowest at 7.7% and Greece the highest at a staggering 57.3%

Data releases of note today include Euro industrial production, we also have Spanish CPI.

USD

The greenback was lower against both sterling and the euro yesterday.

Yesterday was fairly quiet as the market begins to gather pace after veterans day and the official nominee of Yellen to FOMC Chair on Thursday. Aside from FX the oil markets were dealt a game changer. The International Energy Agency revealed the U.S is set to overtake Saudi as the worlds largest producer of oil and has the potential to become entirely reliant on US energy stocks. This shifts the geopolitical scene in the U.S and Middle East, developments as this situation progresses will be fascinating.

Volumes were lower than usual with the greenback mostly bouncing within resistance levels between its most traded pairs. We had some data of significance however market moves were not noticeable. The release of Redbook chain store sales and NFIB index revealed nothing new. Redbook chain store sales came in relatively flat, however retailers are overwhelmingly bullish towards the Thanksgiving cheer, with many feeling it will be a record Christmas, consumer sentiment appears to be recovering and the Grinch of recession is abated, therefore the sector is hoping Americans will splash out.

Presently the market is eagerly anticipating what Thursdays events will bring. The curtain finally lifts on Yellen’s confirmation to Fed chair. Plenty of curtains have been twitching over past weeks, as the market speculates on what this means. Yellen was a chief architect of QE and alongside Bernanke and helped create the structure of QE that we are currently experiencing. However, the focus is not on what she has done, more so what she intends to do. Naturally everybody is asking the same question- “Is Yellen more or less dovish than everyone thinks” and could tapering ensue in December. Chatter to this effect peaked on Friday following far stronger than called NFP. General consensus points towards Q1 next year for tapering to begin, regardless whenever tapering begins we will see movement, not only in USD but worldwide currency markets. Right now we have the calm before stormy weather.

Data releases of note out of the U.S today will be the September budget statement.

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Written by Tom Tong

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