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Currency Matters

David Cameron secured a historic EU budget deal on Friday when European leaders agreed to a cut in EU spending for the first time since the EU was established. After 25 hours of negotiations, and despite strong opposition from French President Francois Hollande, an agreement was reached.
Despite the result on Friday having been potentially bullish for the Pound, this morning Sterling is slightly down against both the Euro and the Dollar. GBP/EUR is currently trading at 1.1730, down from a high this morning of 1.1820. Similarly GBP/USD is down 1.5715, having been as high as 1.5809 earlier. However we may see the Pound recover some of its recent losses later this week should key UK data due out on Tuesday and Wednesday show improvement, something the UK hasn’t had for several weeks now.

Please find a summary of this week’s economic calendar below:

11.02.13
Eurogroup Meeting
18:00 FOMC Yellen Speech

12.02.13
UK BOE Inflation Letter
00:01 RICS Housing Price Balance
09:30 UK Core Consumer Price Index
09:30 UK Producer Price Index
09:30 UK PPI Core Output
13:45 BoC Governor Mark Carney Speech

13.02.13
10:00 EU Industrial Production
10:30 BoE Quarterly Inflation Report
10:30 BoE’s Governor King Speech
13:30 US Retail Sales

14.02.13
03:00 BoJ Interest Rate Decision
07:00 German GDP
09:00 EU GDP
13:30 US Initial Jobless Claims

15.02.13
09:30 UK Retail Sales
14:15 US Industrial Production
14:55 US Reuters Consumer Sentiment

Mark Webster

Stick or Twist

The Euro is slightly down this morning as remnants of the political scandal that emerged in Spain last month continue to linger. Allegations published in Spanish Newspaper El Pais last month, suggested that from 1997 onwards, Spanish Prime Minister Mariano Rajoy received regular payments of €25,000 that were hidden from tax authorities. Although these are, at present, only allegations, the mere suggestion of such conduct is enough to worry markets. Should these allegations be proved to be true then we could see sentiment towards Spanish assets turn considerably negative, which would inevitably hurt the Euro.

Additional uncertainty is also likely to grow within the Eurozone as we approach the Italian elections at the end of this month, especially should the gap close further between front runner Pier Luigi Bersani and Berlusconi’s PDL party. This uncertainty is likely to have contributed to the tapered advance of the Euro this week, as its unrelenting strengthening seems to have now been somewhat restricted. The Euro has dropped off against both Sterling and the Greenback this morning, with the Pound having risen by nearly half a cent so far today against the Euro, and the pair is currently trading at 1.1575. The Euro has similarly dropped off against the Dollar, falling to a daily low of 1.3513 this morning, before holding, and slightly recovering to its current level of 1.3530.

Markets are likely to be trading relatively flat this afternoon with little economic data due out and only UK House Price data having been released this morning, showing prices declined in January. However the main driver behind decreased volatility today is likely to be the fact that market participants are holding their current positions ahead of the ECB and BOE interest rate decisions due to be made tomorrow afternoon. Whilst both rates are expected to remain unchanged, should there be any adjustment, this could well provoke substantial movement in the Pound or the Euro.
In yesterday’s blog we recalled comments made by Luxembourg Prime Minister last month that the Euro was then already ‘dangerously high’. It would appear that such concerns are growing throughout the Euro Zone regarding the current strength of the Euro. French President Francois Hollande commented yesterday that “the Eurozone must, through its heads of state and government, decide on a medium-term exchange rate”. It is likely that Mario Draghi will face questions regarding this issue at the ECB press conference tomorrow and any suggestion of controls being placed on the Euro could weaken the currency considerably.

Mark Webster

The Runaway Euro Train

The Euro keeps going from strength to strength. Despite a small setback yesterday following Luxembourg Prime Minister Jean-Claude Juncker’s comments that the Euro is “dangerously high”, the common currency returned to its advance today. GBP/EUR had managed to hold at 1.2010 earlier in the week and began to recover slightly yesterday, however this morning the pair broke below this level hitting a daily low of 1.1980. Following the bullish comments by Mario Draghi last week regarding the Eurozone, a drop in Spain’s borrowing costs this morning after the sale of 4.5 billion Euro bonds further catalysed the Euros strengthening. This has also led to EUR/USD pushing back up to 1.3350+ this morning, heading back towards the heady heights of 1.34 which we last saw on Monday, when a new 11 month high was established.

There is very little economic data out this morning other than employment figures coming out of Australia. The Australian Employment Change for December was recorded at -5.5K, a substantial decrease from the previous month and well below market expectations of 2.3K. This led to the Aussie Dollar dropping off against the Yen and AUD/USD also dropped off, recording a daily low of 1.0493 immediately following the data release.

Markets will have to wait until this afternoon for the next instalment of economic data, in which we will see figures from the US regarding Housing Starts, Building Permits and Initial Jobless Claims. Whilst the data this afternoon could well stoke some movement in the markets, it is likely that any substantial moves will be delayed until after crucial data is released in China tomorrow. In the early hours of tomorrow morning Chinese GDP, Industrial Production and Retail Sales figures will be released and could spark significant market movement.

Mark Webster

Watch and Wait

Markets are relatively flat this morning as economic data coming out of Europe has thrown up no real surprises. The German Consumer Price Index for December was bang on expectations at 2.1%, as was the UK CPI at 2.7%. There were only a few marginal variations today as the UK Producer Price Index – Output fell short of market expectations recording a figure of 2.2%, whilst UK Retail Sales improved by 0.1% to 3.1% in December.

The data released so far today has caused very little movement in Sterling or the Euro. The pair is currently trading at 1.2030, having found support at 1.2010 late last night following a dismal day for the Pound. GBP/EUR broke below a key level of support at 1.2170 on Friday and continued its slide yesterday. Should the psychological level of 1.20 break, the next area of support for the pair is 1.1946. A break below this would be a strong indication that we could return to sub 1.17 levels, a level not seen since December 2011.

Cable is currently trading at 1.6067. This price level is a key trading area and is currently sitting on a six month upward trend line. The pair has been oscillating between Fibonacci levels at 1.6120 and 1.6003 for the past ten days with only minor breaks either side. A break below 1.6010 would have to break the six the month upward trend line and would indicate a potentially significant drop off and it is likely the four month low of 1.5825 would be tested once again.

Mark Webster

Euro Appreciates

The Euro has continued to appreciate following Thursday’s European Central Bank press conference where ECB President Mario Draghi failed to meet market expectations by not hinting at a rate cut in the coming months.

GBP/EUR is currently trading at 1.2070, a key level of support, after having broken through 1.2168 on Friday, a level which had held for the previous nine months. Todays’ weakening continues a seven day trend for Sterling, as Britain’s position within Europe becomes more and more ambiguous. David Cameron’s attempt to tread a fine line between Conservative Eurosceptic’s and pro-European business leaders is proving difficult and his bid to negotiate a reduction in powers held by Brussels over Britain, whilst maintaining the UKs membership, would appear impossible. Any concrete signs of a full withdrawal of the UK from the EU could prove very negative for Britain and would likely stifle economic growth for the country. Leaders from across Europe and even the US have warned Britain of the damaging effects such a move could have, and the markets would appear to be making their feelings clear too as the Pound continues to weaken.

Elsewhere in the world today, the Yen has continued to weaken as newly elected Japanese Prime Minister Shinzo Abe, looks set to elect a central bank chief who will continue to expand monetary easing in the country. In a further attempt to increase the countries competitiveness internationally, it is hoped that weakening the country’s currency will help drag Japan out of decades of economic stagnation.

EUR/USD broke above a key Fibonacci level of on Thursday and has continued its appreciation since. The pair is currently trading at 1.3368 and should the Euro continue to strengthen the next price level we are likely to see will be at 1.3487, however should momentum dissipate the pair may well fall back to 1.3143.

Cable is currently trading at 1.6124, a significant price level that has been mentioned in previous blogs. We are likely to see the pair trade between 1.6010 and 1.6309 until a consistent break is made either side of this channel. We may have to wait until next month until we actually see this though, when the effects of the delayed fiscal cliff remerge in Washington and US politicians once again commence battle, this time over government spending.

Please find a summary of this week’s economic calendar below:

14.01.13
10:00 EU Industrial Production
15:30 Bank of Canada Business Outlook Survey
21:00 US Fed’s Bernanke Speech

15.01.13
01:00 UK RICS Housing Price Balance
07:00 German Consumer Price Index
08:00 German Gross Domestic Product
09:30 UK Consumer Price Index
09:30 UK Producer Price Index
09:30 UK Retail Price Index
13:30 US Producer Price Index
13:30 US Retail Sales

16.01.13
10:00 EU Consumer Price Index
13:30 US Producer Price Index
14:15 US Industrial Production
19:00 US Fed’s Beige Book

17.01.13
00:30 Australian Unemployment Rate
09:00 ECB Monthly Report
13:30 US Housing Starts
13:30 Building Permits
13:30 US Initial Jobless Claims

18.01.13
02:00 Chinese GDP
02:00 Chinese Industrial Production
02:00 Chinese Retail Sales
09:30 UK Retail Sales
14:55 Reuters/Michigan Consumer Sentiment

Caught Between a Rock and a Hard Place

Cable is trapped. GBP/USD has been trading pretty much sideways for the last couple of days and appears trapped in a clearly defined channel, a break either side of which could be very significant. Fibonacci levels show clear support at 1.6010 and substantial resistance at 1.6124, with a further key level found in between at 1.6067, which is where the pair is currently trading. A break above the upper price level would suggest a move back towards 1.6309 and potentially a test of the recent sixteen month high of 1.6381. Conversely, should the lower end of the current price channel give way, the pair is expected to fall back to the next area of key support at 1.5909 and below this the four month low of 1.5825 could be tested once again.

The key question is obviously; which way will the pair break? Cable is currently in a six month upward trend and what could make or break this trend could well be economic data released later this week. Tomorrow we will see the Bank of England release their interest rate decision at 12:00 GMT. Whilst rates are expected to remain at their current levels, any increase, or even a suggestion of an increase, would be very bullish for Sterling. As we saw last week in the US where the FOMC minutes suggested there could be an earlier than expected end to monetary easing policies and interest rate increases – the Greenback immediately strengthened right across the board. Whilst we will also see various figures released in both the UK and US on Friday, the crucial variable could come from outside both of these countries. On Thursday and Friday this week we will see crucial data coming out of China, including Chinese; Trade Balance, Consumer Price Index and Producer Price Index. Should these results prove favourable, this would be extremely positive for the global economy and invariably lead to increased optimism globally and consequently a weakening Dollar.

This Morning we saw the release of UK Goods Trade Balance figures that showed there is now a £-9.164B deficit, worse than what markets had been expecting. GBP/EUR did drop off slightly immediately following the release, however the Pound has recovered and is currently trading up for the day at GBP/EUR 1.2282. EU GDP figures for Q4 were released at 10:00 GMT and had little bearing on the markets as they showed that GDP for the region remained at -0.1%. EUR/USD is currently trading flat at 1.3067, only marginally above a key level of support at 1.3064.

Mark Webster

Dip, Dip, Recession…

The BRC (British Retail Consortium) released data early this morning that showed British retail sales suffered a lacklustre performance last month as sales rose by only 0.3%. The total value of goods sold was up 1.5% from December 2011 but given that inflation is currently 2.7%, this suggests that UK stores actually sold less in real terms.

These figures will have done nothing to allay fears that Britain could well be sliding into a dreaded triple dip recession. However, the British Chamber of Commerce rejected such inferences this morning, stating that economic conditions were becoming more favourable within the UK and the economy would grow steadily over the next few years. Such judgments are based on the back of marked improvements that have been seen in business confidence figures towards the tail end of 2012.

In Europe this morning, data coming out of Germany showed that the German Trade Balance worsened in November. Figures showed a drop in exports from the European powerhouse to €14.6B, down from €14.9B for the month before. This has been followed by mixed EU data that showed whilst EU retail Sales for the end of 2012 fell short of market expectations, EU Retail Sales (YoY) figures improved marginally to -2.6% and EU Consumer Confidence rose to -26.5.

Immediately following the data releases earlier this morning, the Euro dropped off slightly against Sterling and the Dollar. However the currency pairs are now trading relatively flat at GBP/EUR 1.2265 and EUR/USD 1.3115. Cable is also trading flat at present at 1.6084, after hitting a key level of resistance at 1.6124 earlier this morning the pair dropped back down to its current level and looks to be heading for the next level of substantial support at 1.6067.

Mark Webster

Smoothing Over the Cracks

The cracks remain. Albeit cracks of ever decreasing size. President Obama and US House Speaker John Boehner are yet to come to an official agreement over necessary tax hikes and spending cuts, required if the US economy is to avoid falling off the fiscal cliff, however both sides are now beginning to make concessions.

Yesterday saw the most progress made regarding the fiscal cliff since talks began. Much of the discussion has centred around tax rate increases on high income earners. President Obama had initially favoured higher tax rates taking effect on incomes starting at $250,000, whilst Mr Boehner was closer to the $1,000,000 mark. Both parties are now moving closer to the middle of these two figures, however no firm agreement has been reached just yet.

Markets are again relatively flat this morning with only GBP/USD slightly changed, having increased to 1.6220, continuing its advance from late last week where it broke through a key level of resistance at 1.6124. UK inflation data has been released this morning, with the UK Consumer Price Index (YoY) figure hitting 2.7%, marginally surpassing market expectations of 2.6%. This could spark some movement in Sterling, however markets are again expected to be most responsive to any news concerning talks in the US. After the progress made yesterday regarding the fiscal cliff, and a deal being reached before the January 1st deadline looking more likely than at any other time previously, we could well see the Greenback weaken across the board today.

Mark Webster

The Fiscal Cliff-Hanger

The fiscal cliff remains the main focus for traders today. Market participants are watching tentatively for any development as the January 1st deadline looms ever closer. Sentiment had been relatively positive over the last week or so, as reaching an agreement before the deadline looked more than plausible. However a Citigroup survey has found that investors are now evenly split on whether an agreement on tax rises and spending cuts will actually be reached by congress. This increasing level of doubt was conveyed through the US stock markets yesterday as indexes closed down for the day.

It would appear that President Obama and House Speaker John Boehner are not at loggerheads just yet, but it is becoming increasingly apparent they are reaching an impasse. Mr Boehner has accused the President of not being serious about cutting spending, however the President has compromised on tax revenues, now demanding $1.4 trillion, down from $1.6 trillion. With just over two weeks until the deadline is reached, it is not yet apparent whether both sides are simply setting out their positions to see exactly how far they can press the other side or whether their truly is a legitimate stalemate.

Markets are relatively flat this morning, though we may well see movement in the Euro on the back of PMI figures that have just been released. Markit Manufacturing PMI is down across Europe with the EU and Germany both recording a figure of 46.3. However, Germany and the EU both reported positive Markit Services PMI figures of 52.1 and 47.8 respectively.

US Consumer Price Index and US PMI figures are due out this afternoon at 13:30 and 13:58 GMT. These results are expected to be slightly down on last month’s, any improvement on these expectations could bring about some movement in the Dollar, however any significant move is going to be dependent on the fiscal cliff progress.

Mark Webster

Increased Optimism

The Dollar has weakened against the majority of its counterparts this morning following increased optimism regarding the Eurozone after a debt agreement concerning Greece was reached in Europe last week. Whilst some market analysts argue that the current deal is insufficient, this agreement has at the very least sent a message to global markets that Europe will not let Greece fail, and it will remain in the Eurozone. This has led to rising indices across Europe, most notably the Athens Composite, which is up 9% over the last two months. Additionally, this morning Angela Merkel has, for the first time ever, indicated that Germany may accept a write off of Greek debt. This could be a very significant step in creating the first truly viable path for Greece to escape the black hole that it is currently in, however the key word here is; ‘may’.

Furthermore, China has posted positive manufacturing figures this morning. The Chinese HSBC Manufacturing PMI hit 50.5 this month, increasing ever so slightly from 50.4 last month. This has consequently, along with the European factors above, increased risk appetite among investors and has resulted in market participants selling off their ‘safe haven’ Dollar holdings in search of riskier assets.

This afternoon we have manufacturing data and PMI figures coming out of the US, should they be positive we could see the Dollar strengthen slightly, however the main focus for Dollar movement this month will be the ever approaching the fiscal cliff. Should little progress be made on this issue and the January 1st deadline look increasingly doubtful, we could see the Dollar strengthen substantially.

Sterling is up today against both the Euro and the Dollar following positive UK manufacturing data. The UK Markit Manufacturing PMI hit 49.1 this morning, not only increasing from last month but also beating market expectations of 48.0. Following the release of the figures at 09:28 this morning, Sterling has risen to a daily high of 1.2325 against the Euro and GBP/USD has broken through a downward trend hitting an interbank high of 1.6086 before falling back a little. The current rate is hovering around 1.6067, should the rate push above this we could see 1.6124 targeted. Should the dollar not break through this level, the rate may well fall back towards 1.60.

Please find a summary of this week’s economic calendar below:

03.12.12
Eurogroup Meeting
01:45 Chinese HSBC Manufacturing PMI
08:53 German Markit Manufacturing PMI
09:28 UK Markit Manufacturing PMI
13:58 US Markit Manufacturing PMI
15:00 US Construction Spending
15:00 US ISM Manufacturing PMI

04.12.12
European Finance Ministers Meeting
03:30 Australian RBA Interest Rate Decision
09:30 UK PMI Construction
10:00 EU Producer Price Index
14:00 Bank of Canada Interest Rate Dec ision

05.12.12
08:53 German Markit Services PMI
08:58 EU Markit Services PMI
09:28UK Markit Services PMI
10:00 EU Retail Sales
13:15 US ADP Employment Change
15:00 US Factory Orders
15:00 US ISM Non-Manufacturing PMI

06.11.12
09:30 UK Total Trade Balance
10:00 EU GDP
11:00 German Factory Orders
12:00 UK BOE Interest Rate Decision
12:45 EU ECB Interest Rate Decision

07.12.12
00:01 RICS Housing Price Balance
09:30 UK Industrial Production
09:30 UK Manufacturing Production
11:00 German Industrial Production
13:30 US Average Hourly Earnings
13:30 US Nonfarm Payrolls
13:30 US Unemployment Rate

Mark Webster