Euro falls, despite strong Sentiment data, as ECB meeting looms

Enrique Díaz-Álvarez21/Jan/2015Currency Updates

GBP

A strong days trading for the UK currency, as the Pound climbed against both its major peers, finishing 0.4% up versus the Dollar.

Sterling gains against the single currency were resumed on Tuesday amid increased speculation that the European Central Bank (ECB) will announce a plan to buy government bonds this week. This was alongside revised IMF growth forecasts which left the UK projection for 2015 unchanged at 2.7%, although growth expectations for 2016 were cut slightly to 2.4%. Olivier Blanchard, Chief Economist at the IMF, warned that while the outlook for the UK was favourable, weakness in the Eurozone could act as a “brake” on the British economy. The report, however, did place the UK as the fastest growing economy in the G7 in 2014, although Britain is forecast to lose this crown to the US in 2015.

A busy morning expected in the UK today. At 9.30am the Bank of England will be announcing the outcome of its interest rate vote from the monetary policy committee earlier in January. This is followed by earning and unemployment data; Sterling volatility is to be expected.

EUR

The Euro continues to be under pressure in the lead up to Thursday’s key ECB meeting, declining by 0.2% against the Dollar and 0.6% on Sterling.

Investor confidence in Germany rose for the third month in a row in January, climbing to its highest level since February 2014. Falling oil prices and a weak Euro boosted the Economic Sentiment survey, conducted by ZEW, as it soared above forecast to 48.4 in Germany, Europe’s largest economy. The closely followed poll jumped by 13.5 points this month despite the recent Eurozone stagnation and imminent launch of quantitative easing measures. The Economic Sentiment index for the wider Eurozone area also rose to 45.2, its highest level since July. Earlier in the day, German producer prices declined at the fastest pace since March 2010. The Producer Price index was down 1.7% year on year in December having fallen by 0.7% MoM. Energy prices fell by an annualised 4.9% while prices of non-durable goods were down by 1.5%, marking the largest fall in producer prices in a calendar year since 2009.

No data releases out of Europe today. The markets will be driven, as they have been for most of the week so far, by build-up to the ECB’s monetary policy statement on Thursday.

USD

A late afternoon surge caused the Dollar to end trading 0.2% up against its major counterparts.

Sentiment among US homebuilder’s dipped marginally this month, it was revealed yesterday. The Housing Market index, released by the National Association of Home Builders, was down from a revised 58 in December to 57 in January. Despite the lower than expected reading, the index remains very strong, and marks the seventh consecutive month above the key benchmark level of 50, which represents the tipping point between poor and favourable conditions. Speaking at a Brookings Institute event in Washington, Federal Reserve member Jerome Powell announced that the central bank has been convening with large groups of global dealers in order to promote alternatives to the US Dollar Libor rate. Replacement benchmarks could “reduce the risk posed to financial markets” after the notorious ‘Libor scandal’ in recent years that led to global fines of more than US $6 billion.

More second-tier data releases today including Building Permits and Housing Starts at 1.30pm London time, which could lead to moderate movements in the Dollar.

Rest of the world

The Central Bank of Turkey cuts its benchmark interest rate on Tuesday in a bid to spur the economy. Rates were reduced by 50 basis points to 7.75%, citing lower than hoped inflation caused by declining oil prices. The decision comes one day after President Erdogan had criticised the central bank for “standing still”, and not acting while the world cut interest rates.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.