Euro slides further against Dollar and Sterling as economic gloom deepens in the Eurozone
29/Sep/2014 • Currency Updates•
With the uncertainty of the Scottish referendum out of the way, investors began shifting their attention to what we regard as the two key drivers in G10 FX markets over the next few months. First, whether the Bank of England (BoE) or the Federal Reserve will hike first. Second, whether the significant depreciation of the Euro and the newly activist stand of the ECB are sufficient to pull the Eurozone out of the “permacession” in which it has been stuck for at least three years. Last week markets appear to have answered the latter question in the negative, and have yet to make up their minds about the first one. Therefore, we saw the Euro sink vs both Sterling and the Dollar, which moved almost in lockstep to one another.
Main news of the week was the publication of the BBA mortgage approvals number. This came a bit under expectations, which must provide some comfort to the Bank of England that the stability risks from rising housing prices are receding. This didn’t have much impact on market expectations for the first BoE hike. Interest rate futures and options are a 55% probability to hike for the first time at the March meeting. We regard this prediction as a bit aggressive and think that April/May is a more reasonable timetable, as Eurozone weakness will filter through to UK growth through trade numbers.
The steady drip of negative indications about Eurozone economic momentum continued last week. The composite PMI business index decreased from 52.5 to 52.3, reaching the lowest level of the year and confirming the clear downward trend. Since the more timely ZEW investors’ expectations index has been dropping even faster, we expect the downward trend to continue. Certainly the weekly close below 1.27 in the EUR/USD rate validates our long standing bearishness in the Euro and our target of 1.24 for the end of the year, which had long been among the lowest of any forecasters, looks, if anything, too conservative now.
The main news of the week was the highly volatile monthly orders for durable goods. This dropped 18.2%, but this drop came on the heels of a 22.5% increase the month before and is therefore no cause for particular concern. Looking through the short term volatility, the numbers tells us that capex in the US is strengthening and our current GDP growth targets of 3-3.5% for the rest of the year are eminently achievable. The only potential headwind for the US dollar may be the record level of consensus among traders that the US dollar has only one way to go. This positioning sometimes offers a contrarian signal when it is this extreme. On the other hand, the gap in fundamentals between the US and the Eurozone keeps widening. Expect volatility.