EUR gains on trade surplus data. US equities at record highs while USD trades marginally lower

Tom Tong19/Nov/2013Currency Updates

GBP

Events last week reinforced support for sterling. London opened with the pound trading at strong levels across the board. Overall the market continues to display a widely bullish sentiment towards sterling. This view mostly stemming from punchy data on UK growth, namely a change in the likely timescale for an interest rate alteration, record drops in unemployment and a low job seekers claimers count. The BOE has called 2.8% economic growth next year and indicated there is a 55% chance that QE will be altered in Q3. Fundamentally this would initially take the form of a rise in interest rates. Further positive data yesterday showed the U.K is growing faster than any leading economy since the start of the recession. Growth of 0.8% in the quarter to September puts the U.K on top of G7 growth and the driver of economic recovery in the developed world. Latest growth figures saw UK growth overtaking the US, Germany and Japan. BOE minutes will be released on Monday which will give a clearer indication of the BOE stance on the wider economy. Presently last weeks strong data releases contribute to U.K investors views and bode well for future UK growth, hence the recent Sterling strength.

Conversely the strength was not sustained throughout the day. Although the morning saw sterling scalp a 3-week high against the dollar, resistance levels were duly reached which saw sterling retrace gains and close the London session marginally down against the dollar. Euro trading held a parallel, with the pound opening at strong levels.

No data releases out of the UK today.

EUR

A surprisingly positive day for the euro with stronger than called eurozone data providing a respite to the recent carousel of poor data. Accordingly the euro saw gains against both sterling and the dollar. London closed with the euro up against both sterling and the dollar. Asian trading was mixed with little news to trade off. The market will be poised for euro data releases out today with possible pivots if the data contrasts expectations. Yesterday revealed the eurozones trade surplus was €13.1bn in September, notably above expectations of a €10bn surplus. After last week’s shock interest rate cut led to the euro hitting massive lows, many investors had been waiting for positive EU data to prompt the euro to punch back against both sterling and the dollar and regain some of the recent significant losses. Although the gains were welcome, the ECB is still far from happy. Yesterday they stressed that although the economy has started to improve, the strengthening is still far from the levels required to continually propel the eurozone out of the threat of a slowdown in the recovery and the prospect of deflation. Economic growth last quarter came in at 0.4, a mere whisker from a standstill, it’s hardly surprising both the market and ECB are jumpy.

Bundles of data out of the eurozone today- EUR ZEW survey and Construction output. Additionally we have International industrial orders, Greek current account figures and German ZEW.

USD

Mixed day for the dollar yesterday as it traded rangebound. However, close of play saw the dollar down against both sterling and the euro. Losses stemmed from universal dovish noises coming out of the FED. Encouragingly data releases yesterday displayed that wage gains are in line with the unemployment rate. Should this trend continue it could throw up some problems for the dovish members of the FED. Fundamentally the real test will be over the next few weeks, the market will be waiting to see if wages respond to a consistent fall in unemployment. Typically, more jobs heightens competition amongst employers, thus pushing up wages.

Plenty of FED members talking yesterday gave the markets plenty to take in. General sentiment was overwhelming dovish. It appears the FED will keep the cheap money flowing, although QE is working very well, it is almost approaching a paradoxical situation. The DOW and S&P are hitting record highs, yet U.S debt continues to climb as for every fresh dollar off the printing press, 19 cents directly goes to U.S debt. The majority in the market are calling a taper for Q1 next year, meanwhile, widespread support for continual QE is weighing on the dollar.

Presently the greenback is under pressure right across the board, speculation centres on the perception that the economic situation is going to take quite some time to reach levels that lead to a reduction in QE. The dollar index is at its lowest level since Nov 7th, reflecting disappointment over U.S growth and uncertainty over monetary policy.

Data releases of note today include the Redbook index and employment cost. Additionally we have more Fed members talking and T bill auctions.

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Written by Tom Tong

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