With the New Year’s Day right in the middle, this past week has suffered from holiday-mode markets. Many choosing to extend their end of year holiday couple of extra days before returning to their desks this coming Monday.
The early part of the week saw the Cable extend its rally from previous weeks on speculation that the Bank of England (BoE) will be forced to increase interest rates sooner that it has previously forecast. Early Thursdaysaw the pair touch its highest level since August of 2011, however the level was short lived.
It was a bit of a perfect storm for the Cable: A near 4-big figure rally in 2-weeks, thin markets, weak data and some bearish technicals triggered a sharp reversal. GBPUSD had just touched fresh multi-year highs and technical indicators were pointing to overbought territory, which led to profit taking. Then a below forecast Manufacturing PMI was released (57.3 actual vs. 58.0 expected), prompting additional selling activity, which was amplified by thin holiday conditions. By the time the dust settled, the pair had tumbled almost 2 big-figures and erased a week’s worth of gains.
This reversal takes some of the sting out of rates that short-term Cable buyers have experienced through the holiday session. Looking forward the depth of the late-week reversal takes a bit of the luster off of both the pair and the Sterling in general. Which in turn could lead to consolidation at post retracement levels heading into Thursday’s BoE announcement.
After EUR$ & EURJPY touched multi-year highs late last week, it’s been a negative week for the common currency as well. The last couple of days has seen a round of short-covering and profit taking in the Japanese Yen, which has weighed on the Euro. As this week draws to a close, EURJPY has backed away almost 3 big-figures from last week’s high, as has the EUR$. Also taking its toll on the common currency was a report this week which indicated factory output in France has recently declined to a 7-month low. France, the Eurozone’s second largest economy, has so far weathered the crisis well, but recent data prompted the Lisbon Council, a Belgian think tank, to call France “the real sick man of Europe” and to warn that the “French aversion to reforms and its politics are indeed a serious tail risk”. Which has cause the Euro to go on the defensive.
Next week, after a drought of data over the holiday session, there will be plenty of releases for investors to chew on. The end of the week will be particularly exciting with activity from both the BoE and the European Central Bank (ECB) on Thursday, and employment statistics out of the United States on Friday. No change in policy is expected from BoE governor Mark Carney. Unemployment in the UK is still above the 7.0% forward Guidance threshold and lately inflation has backed away from 3.0%; the upper limit of the BoE’s 2.0% target, with the 1.0% band on either side. Giving Carney the flexibility to maintain extraordinarily loose monetary policies in support of real economic expansion.
After stunning markets in November with a rate cut and stark warnings about deflationary risks, ECB President Draghi’s has been singing a different tune. In an interview last week he commented that there doesn’t appear to be an “urgent need” for an additional rate cut. He further noted that in some countries exist “encouraging signs”, including diminished budget deficits and fledgling economic recovery. With this in mind, it’s unlikely that the current rate, already at a record low of 0.25%, will be changed on Thursday. However the one thing to watch out for will be any reference to the recent Euro strength. The common currency outperformed many of its peers in the second half of 2013, particularly the JPY & the USD. This poses risks to Eurozone exports, which in turn threatens the broader recovery.
Despite not being EU or UK related, it’s hard to ignore the global impact that events next week in the United States are likely to have. First off is Janet Yellen’s nomination vote in the US senate on Monday. She is widely expected to pass this vote, bringing her one step closer to being Ben Bernanke’s replacement and the first female chairperson of the Federal Reserve (Fed). Then Wednesday has the minutes from the last Fed Meeting slated for publication. In light of the recent decision to taper, the minutes will be crucial, as they will give insight into where the Fed stands on the schedule for further asset purchase reductions. Finally Friday is ‘Non-Farm Day’, the last two results were shockingly good, posting 200k or above and helping bring the unemployment rate down to 7.0%, its lowest level in 5-years. Expectations according to a Reuter’s poll is for a result of 193k, and for the unemployment rate to hold steady at 7.0%. An on target or better result (especially anything above 200k for the third consecutive time) is likely to be a boon to the Greenback, which has trended sideways since tapering was announced.
More: What is ‘The Trend’, how do we detect it, and why does it occur?
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