Sterling up, euro flat and dollar comes back overnight

Tom Tong15/Jan/2014Currency Updates

A better day for sterling as inflation hit target, while the euro was tentative to take advantage of decent data. A good day for the dollar on the back of increased global growth reports.

GBP

Yesterday’s inflation figures came in on target at 2% for the first time in four years, sending sterling up half a cent against the dollar and .2% on the euro. The drop in price rises will be welcome news not only to consumers but to Mark Carney and the MPC, as easing price pressures give them more breathing space on an interest rate decision. As UK inflation trends downwards, joining the eurozone (0.7%) and the US (1.2%) on the path to low inflation, the decision on increasing interest rates from 0.5% is unlikely to happen much earlier than expected. Overnight trading saw dollar strength claw back earlier gains, with cable opening this morning just slightly up from the same time yesterday. The RPI, a measure of inflation which includes house prices, showed that house prices are rising faster than general inflation in the rest of the UK as well as London and the south east, a sign that the so far seemingly London-centric recovery might be spreading across the country.
No data of note out of the UK today.

EURO

A rather subdued day for the single currency as markets showed little reaction to strong industrial production figures yesterday. Despite 1.8% MoM growth (with Ireland leading the charge at 11.7%), the biggest rise since mid-2010, adding air to the lungs of the eurozone’s recovery, the euro was only marginally up against the dollar by the close of play, and slightly down against sterling. Yesterday’s news that money market lending rates increased between 25% and 40% in December was likely praying on the mind of euro buyers; with bank’s liquidity tied up in government loan repayments less is naturally available to consumers – leading to less investment and possibly choking off any tentative recovery the EU might be seeing. Europe-wide inflation stuck at 0.7 again for December, more worrying news for the union that seems to take one step forward and two steps back. Elsewhere in Europe Francoise Holland announced €30bn in tax cuts for French businesses in an attempt to sooth investors. Good production figures of 1.4% will help him along his way but he will have to do a lot more to shake off the ‘sick man of Europe’ tag. Similarly to sterling, the Asian session saw euro drop points against the dollar, losing 0.2% by this morning.
Minor data today from Germany (GDP growth) and Spain (inflation).

USD

Another successful Asian trading session for the Greenback saw it make gains against nearly all of its currency pairs, with Bloomberg’s Dollar Spot Index, a composite measure, up 0.3%. The dollar took advantage of its position as the global currency, and of good timing, to take a big slice of the pie dished out by the World Bank when it raised global growth forecasts for 2014 up 0.2 to 3.2%, a 25% increase on 2013. Risk averse investors who had been out of the market since the start of the global recession waded back in with gusto, sending stocks up around the world. European markets will likely bounce back as the bullish sentiment filters down, but successive sessions of dollar strength will cheer those on the other side of the Atlantic. US retail sales increased by 0.2% in December, beating economists’ projections and giving more voice to the dollars cheerleaders.
Today sees the Fed’s beige book report, along with mortgage applications and producer price indices.

RoW

Having upgraded it’s global growth forecasts for 2014, the world bank abruptly changed the sentiment of its report by issuing a stark warning on emerging markets. It warned that lessening central bank support for advanced economies could decrease capital flows to emerging economies by up to 80%, throwing some countries into crises. Depending on the rate and smoothness of tapering by the Fed, BoE and elsewhere, it could be a tricky year for emerging markets and, consequently, a volatile period for their currencies.

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Written by Tom Tong

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