GBP eyes further gains; Sentiment weighs on EUR

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Highlights:

• UK economic data mixed, Sterling end week in neural state but eyes potential for future gains

• BoE chief Mark Carney catches markets by surprise with glass-half-full Inflation report

• Eurozone output numbers paint a bleak picture

• EURUSD ends week near multi-month lows as sentiment weighs on common currency

The Sterling started the week on weaker footing following a lower than forecasted Consumer Price Index (CPI) result. Expectations had been for an annualized 2.5%, however the actual number came in at a disappointing 2.2%. This was a bit of a blessing in disguise for policymakers in the UK. The sharp drop to 2.2% from last month’s 2.7% (dangerously close to the inflation target of 2% +/- 1%) reading is concerning. However given the unemployment rate is in the mid-7% area, well above pre-financial crisis levels, it provides the Bank of England (BoE) some flexibility to maintain accommodative policies without the risk of losing control of inflation.

The day after the soft CPI result British employment statistics were released, which in contrast printed better than expected. Data showed that in the month of October 41.7k fewer people claimed state benefits in the UK, versus expectations for 35.0k less claimants. This in turn helped pull the Unemployment rate down to 7.6% from 7.7% the month before.

The combination of moderating CPI and growth in the labor sector was a dream come true for Mark Carney, who has struggled to get the UK recovery on track after taking the helm of the BoE this past summer. Carney gave his Inflation Report this week, in which he was surprisingly optimistic, upgrading the BoE’s growth outlook to 1.6% for 2013 & 2.8% in 2014. In his opening comments Carney remarked that “for the first time in a long time, you don’t have to be an optimist to see the glass as half full”, and that “the recovery has finally taken hold.” He even smiled, which might be the first time a central banker has done that since 2007. Carney also noted that the unemployment rate was falling faster than previously expected. Suggesting that it could hit 7.0%, the threshold outlined in forward guidance as a prerequisite to any rate hikes, by the end of 2014 (though most-likely in Q1 2015). Previously the BoE had not expected unemployment to drop to 7.0% until Q2 2016.

Following the Inflation Report and employment data, the Sterling went on the offensive, reclaiming all of the week’s previously lost ground, and then some.  Despite all of the volatility in Sterling pairs, as trading winds down for the week GUPUSD and GBPEUR are both in neutral territory inside of recent ranges. Though, from a sentiment perspective, both pairs look to be cautiously eyeing potential gains in the future. With the European Central Bank (ECB) cutting rates last week, and recent Eurozone data disappointing, broader themes seem to favor the Pound. The plot is similar when comparing the British unit to the Greenback, Janet Yellen’s confirmation hearings this past week have pained a dovish picture of the incoming chairperson, once again tilting the scales in favor of the Sterling for the time being.

Before moving on from the British pound, it’s worth noting that BoE activity and easing sentiment from lawmakers in Japan this week has pushed the GBPJPY through key resistance at 160.00. The pair is now trading at levels not seen since 2009, meaning it’s been 4 years since the Japanese Yen could be bought at such favorable rates.

Eurozone data this week highlighted troubled waters ahead for the common currency. Sentiment was already poor following last week’s surprise ECB rate cut and the bad news plied on with GDP results showing contraction in France & Italy, and shirking output growth in Germany. This in turn caused the broader EU GDP number to miss expectations. While cross trading and Yellen related sentiment helped stem further losses in the EURUSD, the pair continues to trade near lows established last week. The outlook for the pair is not encouraging. With core economies like France, Italy, & Germany struggling, and the ECB easing, it feels like the EU hasn’t hit bottom yet. Meanwhile the US & UK look to be in the early stages of an economic upswing. The one exception to the above is Japan, the common currency is near multi-year highs versus the Yen, driven by a deeply expansionary fiscal & monetary bias in Japan.

Looking to next week, UK data is pretty sparse. Tuesday has some BoE activity (MPC vote breakdown and more inflation testimony), but this simply retells the story for which we already know the conclusion. Otherwise there’s no top-tier data to speak of, the Sterling will accordingly take its cue from broader market sentiment. Eurozone data on the other hand there is a decent amount of: German sentiment data on Tuesday & Friday, and a fistful PMI results on Thursday. Given the trend of disappointing October data, it’s difficult to be optimistic about the Euro next week. There is some important American data out next week, including: Retail Sales, PPI, & PMI. This data was collected during the government shutdown and will be heavily scrutinized.

Further reading: Yellen’s testimony to QE sends USD plunging lower

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About Author

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.

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