The Euro has continued to crumble over the past week, falling to a 12-year low against the Dollar, and a 9-year low against Sterling. The Greenback has also been on a rally, strengthening across the board, breaking the fundamental level of 1.50 against Sterling on Thursday.
In what has been a very light week on the data calendar, we have been paying close attention to key policymakers and the various statements they have made.
Front and centre was the Bank of England, led by Governor Mark Carney and his statement to the House of Lords. He confirmed he expected inflation to remain near zero for the entirety of 2015, and that he currently sees no reason to change the target level away from 2%. This means that an interest rate hike may be further away than initially thought for the UK. He also stated that he believed the UK economy would continue to grow, as would wages, meaning a real-terms increase across the nation. This positive sentiment was supported by his MPC colleague Iain McCafferty, who stated at a separate event that there was no evidence of deflationary psychology in the market. Although inflation is currently negative, retail and consumer spending are still high, and consumers to not appear to be putting off purchases in the expectation that they will be cheaper in future months.
Across the channel, the European Central Bank started their Quantitative Easing programme on Monday as expected, partly contributing to the recent move. Another part of Mark Carney’s testimony was that he expected the Eurozone’s programme to contribute around 1% to the continent’s GDP number, and that growth for the Eurozone was positive for the UK, whatever the impact on currency rates.
Elsewhere on the data calendar, Wednesday saw UK Industrial Production data go up to 1.3% from 0.8% on an annualised basis, whilst manufacturing was actually lower than the previous 2.6% at 1.9% – something of a mixed picture. In the US, jobless claims were lower than both consensus and previous months, further supporting the greenback, but all eyes are on the FOMC meeting next week.
Looking to the week ahead, it is a relatively busy one for both data and speeches. The statements from policymakers are being watched more closely than usual at the moment as we look for clues as to medium term policy for the UK, Eurozone and US markets.
We kick off on Monday with a statement from Mario Draghi. His comments will be analysed for analysis of the QE programme. Tuesday sees the German ZEW survey, which measures economic sentiment in the Eurozone’s largest economy. Based on an index where 50.0 is neutral, we are expecting a reading near 60.0, which would show the German economy is recovering very well. We also see Eurozone CPI inflation expected to continue to be negative around the -0.3% mark.
Wednesday shifts back to the UK as we see the unemployment rate and average wages figures. We expect unemployment to continue to fall and average earnings to rise again, further good news for the UK. Most importantly on Wednesday we see the budget from George Osborne. Given that we have an election only 2 months away, we can expect the Chancellor to unveil all kinds of great giveaways in an effort to bribe voters. However, if it is too much spending, markets may take a dim view as the budget deficit is still far too high for most people’s liking.
Wednesday also sees the Federal Open Market Committee Meeting, as Janet Yellen and company get together to discuss policy. We aren’t expecting any interest rate changes, but they will release a statement on Thursday evening, the language of which will be carefully reviewed. Previous guidance suggested they were “patiently watching” the markets – if they remove the word patiently on this occasion, it could signal that a rate rise is due in the summer, which would strengthen the Dollar. Thursday also sees US Unemployment claims.
In our latest podcast, we discuss QE: Who got it right, Krugman or the Gold bugs?
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Week to Date
EUR: Draghi Statement
EUR: MGerman ZEW
EUR: CPI Inflation
GBP: UK Unemployment
GBP: UK Average Earnings
GBP: UK Budget
USD: FOMC Meeting and Statement
USD: Unemployment Claims