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ECB & NFP headline first week of December

After a couple of weeks of losses related to recent monetary policy guidance, the British unit has steadied itself. In the aftermath of the Quarterly Inflation Report Sterling gave up nearly 4 big figures against both the Euro and the Greenback. However this week both pairs have stabilized thanks largely to an on expectations Q3 UK GDP reading at +0.7% q/q and the fact that the Bank of England (BoE) has remained for the most part out of the spotlight.

Cable looks to have found some temporary support near the 1.56 level, and retraced modestly higher this week. As we come into the end of the year Banks are updating their FX forecasts, which collectively call for this pair to be lower going into 2015. Notably Barclays is calling for a move into the 1.40’s early in the New Year, the pair even perhaps plunging as lows as 1.41. This is based on the expectation that external risk factors and persisting soft prices growth (inflation) will see the BoE sidelined until late 2015. While such a move feels a bit extreme given the capitulation from 1.70 in the summer, the logic is sound and presents a good framework from which to view the pair.

GBPEUR traded sideways this week oscillating on either side of the 1.26 figure. Ongoing concerns in the Eurozone have helped the pair recover from the 1.24 handle that it was trading in last week and continue to bias expectations in favour of the Sterling. The bounce this week confirms the range that the pair looks to be settling into, roughly bound to the low side by 1.24, while the upper 1.28 handle has established itself as crucial topside resistance.

The situation in the EU is looking ever more grim as despite massive stimulus on the part of the ECB, the common area is struggling to kick-start the economy. Unemployment remains extremely high, confidence is deteriorating, and as discovered this week, inflation continues to limp along at negligible levels. The Eurozone Consumer Price Index (CPI) read +0.3% this week, well below the target +2.0% level and dangerously near deflationary levels. In fact at a speech this week European Central Bank (ECB) president Mario Draghi warned that a “lack of structural reforms raises the specter of permanent economic divergence between members,” which he went on to conclude “threatens the essential cohesion of the Union, this has potentially damaging consequences for all.” It’s beginning to look like unless they act quickly, decisively, and with a single cohesive strategy, Policymakers in the EU could soon find themselves defending the legitimacy of the single currency, again.

As tends to be the case, the first week of the month is always an exciting one. The week starts off with the UK Purchasing Managers Index series released daily starting Monday for the Manufacturing, Construction, and Services sectors. This series, taken together, is a good leading indicator for many other more important economic releases including Inflation, GDP, and unemployment. As such the 3 readings tend to be closely watched. While the Construction sector in the UK remains strong, driven primarily by activity in London, the other two sectors have trended lower through 2014. Particularly concerning is the manufacturing sector, for which the last reading closed in on the critical 50.0 level; which separates a state of growth from one of contraction.

Additionally, on Thursday, the UK will see the BoE make its regularly scheduled monetary policy announcement. However in light of results of the November 12th Inflation report, at which the BoE acknowledged more significant than expected disinflation, no change in policy is expected. Given the BoE’s tendency to not issue guidance if there is no change in policy, Thursday’s even could pass largely unnoticed by currency markets

The ECB policy announcement, also on Thursday, will likely draw significant attention from financial markets, perhaps leading to elevated volatility. Despite the fact no change in policy is expected on behalf of the ECB, a press conference with both prepared statement as well as Q&A period is scheduled. At which ECB President Mario Draghi will surely be grilled for details on the recently announced QE program. Specifically observers will seek clarity on the projected size of the program and whether sovereign bonds, which are currently excluded, might be added into the list of approved assets. As discussed above, recent data does not paint an encouraging picture for the EU. Thus it’s unlikely that Draghi will say anything on Thursday that gives currency markets any reason to be optimistic about the Euro, particularly in the short term.

Finally on Friday American labour market statistics will be announced; including, non-farm payrolls, the unemployment rate, and earnings growth. Generally speaking expectations are encouraging and suggest that the local economic recovery is continuing; signaling potential gains for the Greenback next week.

The consensus forecast is that 228k jobs were added to the American economy in November, up slightly from the 214k jobs added in October. This is believed to have helped hold the unemployment rate at the 6-year low of 5.8%. Finally an earnings growth reading of +0.2% month-over-month is expected; the best result since August. Average Earning have been a blemish on the labour market lately as despite the decreasing unemployment rate weak earnings growth suggests that slack remains. This slack is believed to have contributed significantly to under target inflation in the USA since the onset of the global financial crisis. As such markets will be particularly sensitive to the earnings outcome on Friday.

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David Starkey

David Starkey

David Starkey is a currency options dealer and market analyst for Cambridge Mercantile Group. A fascination with the everyday impact of globalization on society led David to pursue a degree in International Business from the University of Victoria. From there Forex was a natural fit. He has worked as a currency trader, risk manager, and hedging expert in both Canada as well as the United States for several non-bank brokers. Cambridge Mercantile Group.