It was certainly an exciting week in the world of currencies. A string of encouraging UK data prints helped stem last week’s Sterling unwind. American GDP & Non-Farms Payrolls both had blockbuster results, which has eased nerves about the potential economic impact of the recent government shutdown. And the European Central Bank (ECB) spooked markets with an ‘unexpected’ rate cut, which triggered a Euro sell-off.
Despite some speculation last week that an ECB rate cut was in the cards following a record unemployment result (12.2%), early action this week saw markets discount that possibility. ECB chief Mario Draghi however decided in the end that it was the right time to act; catching investors somewhat off guard when he announced a 25 basis point cut to the overnight rate.
Draghi and company nodded to deflation concerns and a stalling recovery as the catalysts for the policy change. Adding to unemployment concerns, recent data puts inflation in the Eurozone at 0.7%, less than half of the 2.0% target. With the benchmark rate approaching zero and EU regulations forbidding the ECB to engage directly in QE, people are whispering quietly about more unconventional monetary-policy tools, like negative deposit rates and an expanded LTRO program, which is weighing on the common currency.
In the aftermath of ECB the common currency has succumb to a broad based sell-off, with notable losses against the Greenback, Yen, Sterling, and Loonie. Only a couple of weeks ago the Euro was darling currency of markets, however data, the ECB, and the S&P’s recent downgrade of France, point to a shift in sentiment. With this in mind, buyers are presented with a good opportunity to get into the market.
Especially if the currency being sold is Sterling or Greenback. The common currency was trading at multi-year highs versus the Greenback less than three weeks ago. Since then the Euro has given up nearly 4 big-figures. The story versus the British pound is similar, in the last couple of weeks the Euro has declined around 3 Big Figures back to its weakest values of 2013.
The Bank of England (BoE) also had its regularly scheduled monetary policy announcement this week. In line with expectations no changes to any of its programs were made. BoE governor Mark Carney once again committing to accommodative policies until the local recovery is better established. In contrast to Europe though, inflation in the UK is running hot at 2.7% (versus a target rate of 2.0%), putting pressure on the BoE to tighten.
Carney however has explicitly tied the labor market to policy and while inflation is starting to takeoff, unemployment has been stubborn, trending in the upper 7% region””a far cry from pre-Financial Crisis levels of the mid-5% area. For the time being Carney appears comfortable with above target inflation in support of the labor market. Nevertheless at some point his objectives will directly conflict and the BoE will need to tighten, investors seem to think that time will arrive sooner rather than later and have bid both the Sterling and yields up over the last few months.
Following last week’s declines, the Cable confirmed a Double-Bottom thanks to a string of better than expected PMI results this week. The pair bounced off of congestion in the 1.5900-1.6000 area and has moved back into its established range.
The Cable could have enjoyed additional gains this week, however buying was tempered by blockbuster American GDP (2.8% vs. Reuter’s consensus 2.0%) and Non-Farm Payroll (204k vs. Reuter’s consensus 125k) results .The Cable is still trading within a stone’s throw of yearly highs, making a compelling argument for sellers looking cover any remaining 2013 exposure.
Next week may start on a quiet note as it’s a bank holiday in the US, Canada, and parts of Europe, but the data calendar is crowded every day after. UK data dominates the middle of the week, with CPI, unemployment, the Inflation Report, and Retail Sales on the docket. Then towards the end of the week, given recent ECB action, European CPI & GDP data will be front and center. Finally, worth keeping in mind is US Federal Reserve Chair Designate Janet Yellen’s confirmation hearing on Thursday. Lawmakers in the US will press the soon-to-be most powerful banker in the world on her policy intentions. Given the bullet the US economy seems to have dodged this week, tapering and related speculation could also be in headlines again next week.
Further reading: The Federal Reserve becomes the more hawkish central bank
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