Further EUR gains while USD trading flat. US budget deal positive for Washington

Tom Tong11/Dec/2013Currency Updates

GBP

Sterling initially punched against the dollar as investors happily digested the comments made by Carney on the wider economic situation in the UK. However, close of play saw the gains lost and the pound down against the dollar. Trading volumes are down as hints of the inevitable slowdown appear as we approach the festive season. A stronger euro continues to enjoy support as any short term alteration in interest rates looks increasingly unlikely. Hence, euro strengthened against sterling and its wider traded pairs.

A wider economic view displays a rosy situation. Slightly stronger than forecast manufacturing data means the economy is likely to grow an estimated 0.8% in the 3 months to end of November. Manufacturing had its best month in almost a year last month. The sector is heavily followed by investors and provides a parallel view for how the wider economy is likely to be performing as it consists of about 15% of the economy. Trade deficit also narrowed slightly, although it remains bigger than forecast. Despite the widespread bullish outlook for the UK there is still an element of mystery playing out in the market. The environment right now means the market continues to debate over the likely timescale for an alteration of QE and interest rates. The BOE forward guidance is helping the situation. However, the guesswork will surely continue.

We have no data of note out of the UK today.

EUR

The euro continues to enjoy support as any short term alteration of monetary policy from the ECB appears unlikely. Accordingly there is a general sense of optimism for short term euro prospects. 6 days on the bounce the euro has gained against the dollar the longest streak in almost a year. Further euro gains against the pound yesterday and wider gains across the board.

Magic number on EUR/USD right now is 6 – 6 days have seen gains and it is now at a 6-week high against the greenback. The euro has retraced the devastating dip following the surprise ECB interest rate cut. Encouraging industrial production data out of Italy yesterday will calm those who feel the periphery of eurozone nations are holding it back. Industrial production expanded and the economy has stopped shrinking, equally the political situation is now stable after the recent volatility and the nation looks set for further economic gains.

Right now the ECB has a finely stocked arsenal to battle against the threat of deflation. Draghi delivered a speech yesterday and appeared calm over the eurozone’s prospects with no hints of any changes, this further boosts confidence in the eurozone.

Data of note out of the eurozone today includes – German and Portuguese CPI figures, Greek unemployment rate and French Non-Farm Payroll.

USD

Puzzlingly despite the recent strong Non-Farm Payroll and wider macro data out of the US, the greenback is yet to see any real jump. Trading volumes are low and excluding trading against the euro, it seems to be mostly bouncing around resistance levels against its basket. Yesterday saw minor gains against the pound although the euro again strengthened against the dollar. Most dollar investors are probably waiting for a data drop on Thursday prior to putting in positions. Tomorrow will see initial and continuing jobless claims which should reinforce the strength of last weeks Non-Farm Payroll and increase market confidence in the US recovery.

Away from currency markets yesterday saw the controversial and complex Volcker rule put to regulators for a vote. The rule looks to cease speculative prop trading by banks in an effort to ensure we do not see a repeat of the spectacular crash seen following poor heavily leveraged bets on the housing market, which helped trigger the recession.

Over in the White House, US budget negotiators struck a deal to set spending levels till 2015, breaking the latest fiscal headache in the US. The agreement is small in relative size. However, the hope is it means the US can dodge Congress being unable to perform basic functions and slide into partial shutdown. Obama praised the move saying it was a good first step and will provide a further solid injection for the wider political and economic situation. Should this deal be approved it will probably dodge a government shutdown in mid-January. However, it does not completely extinguish the chance of a new budget crisis since it does not increase the US debt limit.

Data of note out of the US today includes – mortgage applications and the monthly budget statement. We also have FED members talking.

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Written by Tom Tong

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