FED minutes reveal no surprises while mixed date out of the eurozone. Sterling enjoys a slight rally.

Tom Tong09/Jan/2014Currency Updates

GBP

Sterling was making mischief again yesterday. Pretty much from the morning open, it scuttled up against its basket. London closed with the pound breaking resistance levels and punching gains against the dollar. Sterling also up against the euro and across the board. Cable hit session highs and the rally was surprising. Bullish sterling sentiment clearly remains, following the report volumes elevated with hot money tipping into the market and lending sterling further momentum.

Daily moves can paint a chaotic canvas, but casting a glance over recent movements provides a clearer picture- a 6-month view shows sterling is uppercutting an impressive 5% rise against the euro and 10% against the dollar with strength stemming from solid UK economic growth exceeding expectations. The question now is whether gains are overextended or this year will see further pivots to the upside.

Plenty of chatter today about the BoE meeting. The street is split over whether the BoE will move the goalposts on QE and a subsequent revision of interest rates. The speed of the UK growth means that the market questions if the BoE will revise its expectations over the likely timescale for an alteration of loose monetary policy. We are holding tight for BoE statement at 12.00 GMT. It’s likely pivots will ensue if any changes are hinted. Trade balance figures this morning will also be closely eyed and are set for release 9.30 GMT.

EUR

Overall a mixed day for the eurozone yesterday. However, not so much for the euro which retraced its recent gains against both sterling and the dollar and closed down.

November unemployment remained flat sitting at 12.1% for the 8th month on the bounce. Good news came from retail sales which showed their strongest monthly rise in 12-years. However, it’s worth noting that this is seasonally adjusted as spending always peaks in the lead up to the festive period. Ultimately, it appears the recovery is yet to notably affect the labour market.

The pick up in retail spending may allude to a wider upside in consumer demand. Data right now is too skinny to determine if this is a trend. However, if so it’s going to relieve some pressure on the ECB to loosen policy as it would temporarily ease deflation headaches. Furthermore, Tuesday brought a surprise drop in euro zone inflation to 0.8% for December. This is a country mile from the ECB target of a whisker above 2%. This was the third month in a row that the reading came in at 1%, so the haunting threat of deflation is still waiting in the wings and it’s no over exaggeration to say that if this escalates the results will be substantial.

The curtain lifts on the ECB interest rate decision at 12.45 GMT. Realistically, no change is expected. Prior to the interest rate decision we have consumer and industrial confidence figures at 12.45, also economic sentiment set for release.

USD

The dollar closed down against sterling and scalping gains against the euro.

The release of the FED minutes was slightly underwhelming and no playground tactics seem to be afoot within the FED with most in agreement on major monetary issues, perhaps the sense of agreement has something to do with the baton passing from Bernanke to Yellen. The minutes really just reflected what we had been hearing over the past few weeks.

In short the decision to pull the trigger on an initial $10bln January taper came from the glaringly obvious significant pick up in labor data, fewer disinflation fears and diminishing full speed QE benefits. This is all underpinned by the growing bullish sentiment for the US recovery with most feeling it is sustainable. Most banks and hedge funds are calling long on US stocks and USD with widespread expectation that the year of the dog will put a bark back into the US pitbull.

Aside from the FOMC minutes we had ADP figures. The ADP employment report showed private payrolls rose 238k in December, beating the 200k consensus. This was also the strongest ADP number since November 2012. Nothings perfect but the ADP figure remains the best indicator for Non-Farm Payroll. The streets still calling a big number with most saying around the 215k mark.

Data of note out of the US today includes initial jobless claims and continuing jobless claims.

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Written by Tom Tong

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