Euro tumbles against sterling, dollar on an otherwise uneventful week
20/Jan/2014 • Currency Updates•
In the absence of key macroeconomic reports or market-moving policy decisions in any of the major economies, equities, bonds and commodities drifted through the week to end moderately up for the most part. Significantly, the euro could not hold its footing in this lackadaisical
environment and tumbled over 1% against other major currencies. Most forecasters are still expecting a growth gap of about 2% in favor of the US for 2014, and therefore we think that the trend towards a stronger dollar has further to run.
Most important release last week in the UK were the December inflation numbers. Although the headline number came only slightly weaker than expected, this was enough to push the YoY rate back to the Bank of England target for the first time since 2009. This constitutes an important validation of the BoE’s decision to overlook inflation overshooting over these long four years and focus instead on providing monetary stimulus, and it ought to significantly enhance the intellectual prestige and self-confidence of the institution. With core inflation running slightly below, and deflationary pressures across the channel building, we expect inflation to head slowly lower during 2014. Beyond inflation, the release of a strong retail sales number on Friday pushed sterling nearly 1% higher against both the euro and the dollar. We think this reaction to a notoriously volatile number that is subject to large seasonal uncertainty this time of the year is unwarranted, and that a clear picture of the state of demand in the UK in December has yet to emerge.
There were moderately positive surprises in the eurozone last week. Car registrations and industrial production both showed healthy gains in November. However, this risk mostly compensates for very weak prior readings, so we see no reason to change our expectations for 0.5%-1% growth in the eurozone as a whole throughout 2014. This growth will not be sufficient to generate the significant employment gains needed to reduce the unemployment rate and put peripheral government finances in a sustainable footing. The only upside surprise to european growth can come from net exports, and this view underpins our very bearish view on the euro against all major currencies save the yen.
We had news on manufacturing and retail sales last week.Both reports were solid, and mostly above expectations. Retail sales rose just 0.2%, but excluding volatile auto sales, the growth was 0.7%. The three-month annualised rate is solidly above 4%, and the same rate for manufacturing is getting close to 7%. We think the run of mild upward surprises from the US economy will continue, and we expect growth of just above 3% for the entire year of 2014 now that the fiscal drag of the previous year is finally behind us.