Euro rallies on slim chance of short term ECB rate cut. Sterling gains on Carney's speech

Tom Tong10/Dec/2013Currency Updates

GBP

London closed with sterling up against both the euro and dollar. With little data out, the market looked to New York for Carney’s speech. This failed to disappoint and sterling found support from the overwhelmingly positive outlook articulated by the Governor. Popping up at the Economic club in New York yesterday, Carney delivered a very positive and dovish speech. Clearly the festive cheer is not lost on the Governor of the BoE and he seems pretty pleased with the UK economic situation.

More importantly the speech marks another uppercut by Carney to try and parry market forces who feel the rapidly expanding state of UK growth and employment rates will trigger an alteration of monetary policy, namely a rise in interest rates. Carney dismissed fears that it is possible as UK growth will begin to retrace. However, the market remains fairly sceptical that a BOE alteration in monetary policy could be up BOE sleeves.

Carneys sleigh will leave New York and alight in London with the market still quizzing BOE movements. However, the general mood remains bullish on UK growth and the wider economy.

Data release of note today includes – MoM trade balance, industrial production and manufacturing production.

EUR

London closed with the euro up against the dollar and sterling. Furthermore, across the board we saw significant euro strength.

Euro had been on the sidelines for the past few weeks, yesterday this changed and the euro was arguably the man of the match. Ever since the ECB interest rate cut the market has been on edge as traders debated whether the situation would lead to penalties and a further alteration of monetary policy from the ECB in a fresh effort to counter the threat of an own goal from deflation. The short term view right now is that any change from the ECB is unlikely. Last week’s ECB meeting benefited this viewpoint with a widely dovish interpretation from investors.

Euro support came from various angles yesterday – tighter money market rates in the eurozone, strong China figures, leading investors to be a little more willing to embrace risk. The result was the euro hitting 6-week highs against the dollar and a 5-year high on the yen. The euro is now within striking distance of its yearly highs seen prior to the ECB interest rate cut. Short term interest rates in the eurozone money market nudged up further making any ECB policy change unrealistic.

The market will focus on Draghi’s speech today for a greater insight into ECB thoughts on performance of the eurozone. Data of note includes – Italian GDP and Greek industrial output.

USD

Despite strong Non-Farm Payroll figures on Friday the dollar had a negative day yesterday with dips against both sterling and the euro. The pound was buoyed by Carney singing praise for the UK, the euro found widespread support as an ECB alteration in policy now seems slim.

The greenback fell victim to US Treasury yields yesterday. Treasury yields remained unmoved following the payroll report. However, the market still has a move priced in for next March and Friday’s numbers failed to move this. As a result, US treasury yields fell down which weighed on the dollar dragging it down. The FED continues to grind to push out expectations for higher rates as it tapers and flirts with the idea of changing its unemployment trigger threshold as the unemployment rate clocks downwards at a impressive speed. Speeches by FED policy makers yesterday shed little light on the situation therefore we saw little movement. We still expect a taper for Q1 next year despite the surprisingly strong NFP.

Plenty of data out of the US today including- Redbook index, wholesale inventories, business optimism survey and various bill auctions.

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Written by Tom Tong

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