Risk sentiment wanes as emerging markets remain in focus

By Alex Edwards at  UKForex, an international money transfer service.

In the UK, Q4 GDP printed as expected  on Tuesday  at 0.7%.   Year on year, the UK economy grew at its fastest rate in six years but the pound actually snapped lower on the news.   In the run up to the data there were growing expectations that the number would be good, if not better than expectations with investors keen to buy the rumour.   It wasn’t quite, which is why GBP/USD fell back below 1.66 to a low of 1.6540.   GBP/USD has continued to trend lower since.

Risk was being sold this week in light of concerns for the state of emerging markets.   The Turkish central bank unexpectedly hiked its overnight lending rate from 7.75% to 12% with a view to preventing further losses in the value of the country’s currency, while the Russian central bank also vowed unlimited intervention to protect the rouble after it fell to a record low on a trade weighted basis.

In the US, the FOMC announced a further cut to its asset purchase program  on Wednesday  night by another $10 billion. With the Fed widely expected to continue its tapering program, liquidity is slowly being drained from financial markets which in turn is compounding fears that capital will continue to flow out of these emerging markets in the near-term.

The USD has attracted safe haven bids and has strengthened across the board.    There were also increasing concerns over the threat of deflation in the eurozone this week – German CPI printed at -0.6% vs. expectations for -0.4%, whilst EZ CPI came in at 0.7% y/y vs. expectations for 0.9%.   It has heaped further selling pressure on the single currency.   We’re likely to hear more from the ECB this week about how they intend to manage this issue when ECB President Draghi makes his accompanying statement to the monetary policy announcement  on Thursday.

US non-farm payrolls are also due next week, and will of course be the focus for markets. We also have PMIs on the way from the UK, as well as the BoE monetary policy announcement, where we expect no change in UK interest rates or QE.

Further reading:  Taper Tantrums or the Start of an Emerging Markets Forex Crisis?