Sterling rises as poor data out of the EU and US lead to slight pullback for both euro and dollar

Tom Tong22/Nov/2013Currency Updates

GBP

Strong day for sterling as support was taken from rising UK gilt yields which mirrors market sentiment that we are in a sustained recovery, eventually leading to BOE moves to tighten monetary policy. London closing with sterling up against both the euro and dollar, opening today with strong support, although bouncing around resistance levels.

Yesterday the market had relatively minor data to shift through and pivot off, namely industrial orders, new home builds and public borrowing. Industrial orders came in surprisingly high which helped the pound across the board and allowed a climb against the dollar which had earlier rallied following the release of FED minutes showing a taper is no longer up the FED’s sleeve. It’s now very much in the table and could realistically happen within the next few months. Further rises against the dollar later in the day after poor Philly data out of the U.S.

New home builds are now at their highest levels since 2008, 28,500 new home builds in the 3 months to September reflect the turnaround in the construction industry. First time buyer registrations have skyrocketed 74.3% over the past year, hitting levels of acceleration never previously seen. Public sector borrowing has been helped by the recovery, last month saw a £200mln drop in borrowing figures. The treasury statement was upbeat- “Britain’s hard work is paying off, the governments long term plan is working and the deficit is down by a third”. The October figures take public sector net debt to £1.2 trillion, just over three quarters of GDP. Evidently still some way to go however the upwards trajectory of growth and government initiatives working well is encouraging.

Data releases of note out of the U.K today.

EUR

Another frenzied day for the eurozone, with the market tuning into Draghi talking at a business conference in Germany. Inevitably noises where made about the interest rate cut and prospects for EU growth in the face of the battle against the horror of deflation and growth figures that are unable to even hit 1%. London closed with the euro down against sterling, conversely slight gains against the greenback following poor data out of the US. Asian trading flat, market is now waiting for CPI and unemployment figures for the Europe, set for release at midday.

Draghi stressed the interest rate cut is for Europe as a whole and the constant examination of individual nations performance does not reflect the wider economic situation. The outspoken defense was fairly hard hitting with Draghi proclaiming- “we are not German, neither French nor Spaniards, nor Italian, we are Europeans and we are acting for Europe as a whole”. We must remember that despite euro currency swings following the ECB rate cut this is not the major focus for the ECB. Indeed that ECB has said EU rates are not the focus with the emphasis being placed on inflation levels. European inflation is now worse than Japan who has been massively crippled in the past, leading to the so called lost decade where growth was almost non existent. The fragility of the EU economy was underlined yesterday by the Markit PMI index showing manufacturing activity slowed from 51.9 to 51.5. This follows poor eurozone third quarter growth. The data will cause more fretting at the ECB, with the EU in poor shape we maintain our bearish view.

Critical data of note out of Europe today includes German GDP, Italian Retail Sales and German Ifo Business Climate

USD

Poor day for the dollar with losses after the FED business index dipped to its lowest levels seen since May. It was widely down across the board in stark contrast to the rally earlier in the week after the release of the FED minutes. London closed with the dollar down against both sterling and the euro, relatively flat overnight.

The market is still meditating over what the release of the October FED minutes mean with an unexpected swing in FED thinking as they alluded to introducing a cut in bank rates which in effect would be another slightly sneaky version of QE. It is pretty clear from the October FOMC minutes that policymakers are somewhat exasperated and/or baffled that markets are so keen on linking the slowing of Fed asset purchases with expectations for short-term interest rates. The DOW and S&P are moving at breakneck speed twice this week sledgehammering previous highs and at these levels everybody wants a slice of the stock market. In the Fed’s view, a slowdown in asset purchases ought not to affect long-term dollar levels and Treasury yields massively, since it would not, per se, signal any change in the central bank’s plans for short-term rates.

In the real world, however, it is blindingly obvious that this is not the case.This realisation has prompted FOMC discussion on the topic of reducing the 0.25% interest paid on excess bank reserves – as a means for the Committee to “…signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds. The situation continues to develop and inevitable movement will stem from what the FED elects to do.

Data out of the U.S today includes Kansas Fed Manufacturing

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Written by Tom Tong

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