Slight dollar gains yesterday. Market awaits BoE minutes and unemployment data today.
22/Jan/2014 • Currency Updates•
The morning was uneventful with the pound merely bouncing around resistance levels. Notable pivots were ensuing following the IMF revision of UK growth forecasts which led to sterling uppercutting across the board. As of October IMF UK growth forecasts were 1.9% and they have now been radically altered to 2.5% This places the UK at the number one spot for the pace of recovery amongst the developed world.
Whilst most in the market participants, including banks and hedge funds remain bullish on the pound, the record breaking retail sales and yesterdays revision of IMF forecasts led to a repeat of chatter over the pound being overextended. Although, this viewpoint may hold reason, short term market movement is unlikely to be on the downside, presently most of the smart money remains long on the pound.
Big morning for sterling today. First up is the release of BoE minutes at 9.30 GMT. Following in quick succession will be – claimant count, average earnings and public sector net borrowing. The markets microscope will mostly lie with BoE minutes and the unemployment data. Right now investors are keen for clarity on the odds of a change in the targeted unemployment rate. Its widely expected for Carney to alter the rate for an interest rate change from 7%- 6.5% today may shed some light on the ongoing speculation .
London closed with the euro dipping against both the dollar and sterling. A slight lift was provided by the Asian session with decent buying interest.
The release of the eurozone ZEW was somewhat disappointing. The market is desperately searching for consistent growth to be displayed from the eurozone but yesterday’s release reaffirms that a positive growth trend remains elusive. The reading coming in below forecasts potentially signals some softness in Germany which after recovering from the recession at a lightening pace has begun to retrace to more normal levels.
ZEW economic sentiment for January came in at 61.7 below forecasts of 64. However the current conditions indicator was 41.2 well above expectations of 34.1.
Yesterday also provided a dose of IMF thoughts over the eurozone. IMF growth forecasts for the eurozone came in flat. More important were the comments made by the IMF which effectively eluded that the eurozone was the main region in the world facing the threat of deflation. The IMF also said the ECB need to continue there fight against deflation and not be afraid of fighting dirty and using any tactics necessary.
Minor data out of thee eurozone today- Spanish trade balance (December) and Portugese current account balance.
The Dollar saw a uptick against both sterling and euro yesterday. Initially we saw cable flat before the release of IMF growth forecasts which ensued a slight sterling rally with hot money tipping into the market. However, later in the day we saw widespread dollar support leading it to retrace the mornings losses. London closed with the greenback slightly up against the pound. Trading against the euro was fairly unexciting. The euro hit a 2-month high against the greenback on Monday. However, these euro gains were quickly flipped yesterday and the dollar retraced all its losses closing up against the euro.
Good news for the US came from the IMF who also revised there growth forecasts to the upside for 2014. This view is mirrored by most in the market, indeed the majority of hedge funds and banks remain bullish in US equities and the dollar. It’s fair to say the reversal in the labor market has been fairly spectacular, also consumer spending is up. The question is if the economy can continue to sprint once the artificial stilts of QE are removed. The FED is expected to flirt around reducing QE in clips of $10bln or move depending on the economic performance.
Key play for the dollar will be Thursday with plenty of macro data set for release which will likely lead to pivots.
Data of note today includes – Redbook index and mortgage applications.