Congress finally managed to reach an agreement yesterday evening regarding an increase to the federal debt limit and a short term budget which will reopen the government and send furloughed workers back to work. Despite Congress having left passing a bill to the very last minute, as has become a common occurrence in recent years, judging by market reaction, investors did not seem too phased despite a plunge back into global economic crisis being potentially imminent.
Following the aversion of what could have been the beginning of a truly global crisis – the first US default in over 200 years – very little changed in the markets. Equity markets remained rather quiet as did the FX market, especially when taking into consideration the enormity of the catastrophe that could have materialised had an agreement not been reached. The dollar rose slightly in the build-up to Congress reaching a deal with GBP/USD falling to a daily low of 1.5893 just after 17:00 yesterday, however the greenback has pared its gains this morning with cable rising to a daily high of 1.6092 and similarly EUR/USD reaching 1.3637 so far this morning after having fallen as low as 1.3472 yesterday.
Tomorrow evening we will see potentially the most crucial Federal Reserve Interest Rate Decision and FOMC statement of this year. Whilst the Federal Reserve is widely expected to maintain interest rates at their current levels, speculation has grown in recent months that they will make their first reduction to their unprecedented bond buying program this month. ‘Tapering’ has been the buzz word for the last month or two ever since Federal Reserve Chairman Ben Bernanke hinted this summer that the Fed would begin to taper its current $85 billion per month bond buying program before the end of the year.
As the state of the US economy has gradually improved over the course of this year and US unemployment figures have closed in on the Fed’s 7% target (disregarding this month’s miserable Nonfarm payrolls), expectations have grown that September will be the month that tapering will begin. The majority of market commentators had been expecting a gradual reduction to begin this month at around the $10-$15 billion mark, however with the very poor Nonfarm payrolls released earlier this month it remains plausible that the Fed will hold firm and maintain their current purchasing levels for yet another month.
Given the amount of speculation that has been afforded to this meeting we can expect to see a substantial amount of volatility surrounding the greenback in the run up to and following the release of the Federal Reserve’s decision. Should the Fed decide to maintain their current level of stimulus we could see cable advance further on its gains this week with a potential test of 1.60 upwards. A reduction of $10-$15 billion would likely hold GBP/USD steady with limited downside risk for sterling following the consistently positive data that has been released recently concerning the UK economy – enough to even suggest that we have “turned the corner” according to George Osborne. Whilst a reduction of $20 billion upwards would likely lead to significant Dollar strengthening right across the board and could see cable par its recent gains whilst 1.56 levels would likely hold off any reversal.
Tomorrow we will also see another interest rate decision however the outcome of which is considered a lot more certain and its impact far less wide-reaching. The Bank of England will release their interest rate decision and minute’s tomorrow morning at 09:30 UK time. BoE Interest rates and stimulus levels are expected to remain unchanged following the Bank of England governor Mark Carney’s comments to a Parliament Select Committee last week where he indicated that the BoE will maintain historically low interest rates for as long as necessary.
GBP/EUR is currently trading close to the 1.19 level, its highest level since the turn of 2013, with a consistent break above 1.1950 potentially signalling a return to levels above 1.20. However, until the outcome of the German Federal Elections later this month, which now seems a forgone conclusion in favour of Chancellor Angela Merkel, movement in GBP/EUR is likely to be limited. Once the German election has finally been decided we may well see a re-emergence of the Euro-Crisis that has notably been shunned from media attention in the run up to elections. A return to Euro-zone bailouts and a seemingly imminent collapse of the euro will only help push sterling back up to 2012 levels against the common currency.
The Bank of England Monetary Policy Committee (MPC) voted unanimously to keep rates on hold and against further Quantitative Easing in July. Some MPC members, however, said more stimulus was warranted but they wanted to look at alternative means of providing it. “An expansion of the asset purchase programme remained one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore sensible not to
initiate an expansion at this meeting,” the minutes said. New Governor Mark Carney therefore obviously voted to keep rates and QE on hold.
As a result the Pound spiked higher against the USD jumping from 1.5128 at 09:25 to 1.5245 just after 09:30. The pound also spiked higher against the Euro hitting a high of 1.1580.
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The Euro has fallen following hints from the European Central Bank (ECB) of a possible rate cut in the future. The ECB left interest rates unchanged at their historic low of 0.50% and commented that “the Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time.”
The Euro fell against the US Dollar from an earlier high of 1.3022, hitting a low of 1.2884 before recovering to 1.29.
The Pound has fallen sharply following today’s statement from the Bank of England. The Bank warned that “in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy”. The Bank’s statement immediately scaled back market expectations of a rate rise from the Bank and with UK interest rates expected to remain low for a prolonged period of time the Pound has fallen markedly. Against the Euro the Pound has fallen from an earlier high of 1.1751 to 1.1585 and against the US Dollar the Pound has fallen from 1.5288 to 1.5075.
Bank of England Statement
The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.
Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile. In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time. Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.
In the light of these considerations, the Committee voted to maintain the size of its programme of asset purchases financed by the issuance of central bank reserves at £375 billion. The Committee also voted to maintain Bank Rate at 0.5%.
The minutes of the meeting will be published at 9.30am on Wednesday 17 July.
The Dollar has continued to appreciate with the Dollar Index breaking last week’s high and reaching a high of 83.50 so far today. GBPUSD hit a new recent low of 1.5136 on the interbank market today and a test of the recent low of 1.5008 last seen on the 29th May is favoured, with a likely break leading to a test of support at 1.4830. EURUSD currently trades around 1.30 after briefly breaking below 1.30 earlier today hitting a low of 1.2991.
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After being challenged by Labour leader Ed Miliband during Prime Minister’s Questions today, Prime Minister David Cameron was more than more than happy to rebuke Mr Miliband’s declaration that the UK economy was faltering by citing this morning’s positive UK jobs data. The UK Claimant Count Change for May fell by -8.6K, surpassing market expectations of a fall of just -5.0K, and UK Average Earnings also rose by 1.3%, one percentage point higher than was expected.
Immediately following the release cable spiked to 1.5678 before levelling out, whist GBP/EUR rose to a daily high of 1.1808 and held close to this level throughout the rest of the morning. GBP/EUR has since levelled off to 1.1790 and continues its long established sideways trade, remaining within the 1.16 to 1.19 range as it has done for the past four months. After reaching a daily high of 1.5682 and closing in on a four month high, GBP/USD has now dropped back to 1.5648.
Sterling is currently outperforming right across the board and has gained 6% in the past three months as recent UK data has suggested a recovery of the UK economy may well be underway. However, should this positive data not continue, combined with Mark Carney’s propensity to freely expand monetary stimulus as required, next month could herald a dramatic turnaround for sterling when Mr Carney begins his governorship at the Bank of England.
With very little data due out for the rest of today, trader’s attention will now turn to tomorrow. Following the bullish remarks made by ECB president Mario Draghi last week and French president Francois Hollande’s declaration at the weekend that “the crisis in Europe is over”, market participants will be focused on the ECB monthly report due to be released tomorrow in the hope that further indication or rhetoric may be given affirming such unqualified optimism. Consequently we could see substantial movement in EUR/USD following the release of this report, especially considering the fact that the pair is currently trading close to a four month high at 1.3295.
Please find a summary of this week’s economic calendar below:
00:50 Japanese Foreign Bond Investment
02:30 Australian Employment Change
02:30 Australian Unemployment Rate
09:00 ECB Monthly Report
13:30 US Initial Jobless Claims
13:30 US Retail Sales
15:00 US Business Inventories
00:50 Bank of Japan Policy Meeting Minutes
10:00 EU Consumer Price Index
13:30 US Producer Price Index
14:15 US Industrial Production
14:55 US Reuters/Michigan Consumer Sentiment Index
As expected this morning UK inflation figures fell, even lower than what the markets had been expecting. UK Consumer Price Index fell to 2.4%, down from 2.8% the previous month and below market expectations of 2.6%. UK Core Consumer price index was also down 40 basis points to 2.0%, recording a figure below market expectations of 2.3%. UK Producer Price Index and UK PPI Core Output were also down at 1.1% and 0.8% respectively.
In what was a rather busy morning in terms of UK data releases, nearly every piece of economic data released concerning the UK economy was negative. As would be expected Sterling fell right across the board following these inflation figures’ release. GBP/EUR fell to a daily low of 1.1777 however remained within the approximate 1.5 cent range that the pair has been trading within for the last month. Similarly Cable fell to a daily low of 1.5163, continuing the pairs decline since early May with a further test of the 1.5157 level now likely and should this break the next area of substantial support being found at 1.5127.
Much earlier this morning we saw the Japanese Yen return to its depreciating ways following Japanese Economy Minister Akira Amari’s much more coy response regarding the potential end to the Yen’s slide against the Dollar. This comes after the Yen strengthened yesterday following the economy minister’s comment that suggested further weakening of the Yen may adversely impact upon Japanese people. The bank of Japan’s record monetary stimulus program would now appear to be having the desired effect that Japanese finance ministers had initially hoped it would. Figures released in Tokyo last week showed that Japanese GDP rose to an annualized 3.5%, suggesting that the Bank of Japan’s efforts to end a decade of inflation are actually having a positive impact on the economy. This increase in money supply has had the inevitable, yet “unintentional”, effect of depreciating the Yen, which rose to above USD/JPY 100.00 two weeks ago for the first time in over four years, and has consequently lead to a boost in exports. Data released so far suggests that BoJ Governor Haruhik Kuroda may actually be able to reach his ambitious target of reaching 2.0% inflation in just two years. USD/JPY is currently trading at 102.68 and speculation will now grow as to whether the pair will reach 105.00.
With very little data due out this afternoon, trader’s attention is likely to turn to tomorrow where we will see a number of key releases. In the early hours of tomorrow morning the Bank of Japan is set to make their interest rate decision and monetary policy statement, potentially giving the market an indication of how long their extremely loose monetary policy will continue. Moving back westwards, later tomorrow morning UK BoE minutes will be released, followed by the US FOMC minutes tomorrow evening. As Sir Mervyn King comes to the end of his tenure as governor of the BoE, it is unlikely that we will see any drastic information released in the BoE minutes, however the market will be keen to see if the FOMC minutes or Fed Governor Ben Bernanke’s press conference give any indication as to when a reduction in the Federal Reserve’s bond buying program will be brought to an end.
As expected, Mario Draghi has just confirmed that ECB interest rates will be cut from 0.75% to 0.5%. As a result of poor economic growth, lingering recession, record high unemployment rates and recent poor inflation figures, the ECB has finally decided that an interest rate cut is necessary in order to help encourage growth in Europe. Whilst the rate cut had been expected by markets today, it remains surprising how long it has actually taken for such a decision to come about, especially given the horrendous condition of numerous economies throughout the Euro Zone.
Volatility increased significantly in the run up to the interest rate decision and remained high post data release. Immediately following the decision markets began to spike, most notably EUR/USD plummeted to 1.3115 and then rocketed back up to 1.3184 in the space of one minute. Similarly GBP/EUR dropped to 1.1789 before rallying back to 1.1813 in just minutes.
Soon after this ECB president Mario Draghi chaired a press conference regarding the ECB’s monetary policy, in which Mr Draghi gave further details as to why interest rates had been cut. It was also disclosed that the ECB would consider taking interest rates to below zero “with an open mind” which has unsurprisingly led to a further weakening of the euro right across the board. GBP/EUR is now trading at 1.1876, whilst EUR/USD has fallen to 1.3063.
Surprisingly there is a reasonable amount of economic data due out today despite it being a bank holiday in many European countries. Inevitably this has turned the focus to the UK and US where we will see PMI figures from both sides of the pond today, as well as an interest rate decision and a potentially revealing FED press conference in the US this evening.
With the recent economic data coming out of the US being somewhat negative, market participants will be keen to see whether the US ISM manufacturing PMI is able to surpass expectations of a fall to 50.9 in April. Following this PMI data, this evening we will see a US interest rate decision and crucially the Fed’s monetary policy statement. Whilst interest rates are widely expected to remain at their current level of 0.25%, spectators will be keen to find out whether the FED gives any indication as to when and how speedily they may begin to reduce their bond buying program. Speculation is growing that the FED could well begin to curtail QE before the end of the year however policy makers will be keen to ensure that any reduction in monetary easing does not result in the weakening of an already fragile economy.
The UK Markit Manufacturing PMI figure was released this morning at 49.8, beating market expectations of 48.5, following which sterling immediately spiked to a daily high of 1.1819 against the euro before dropping back. Similarly cable spiked to a daily high of 1.5590 before returning to its current level of 1.5570. Following these spikes in volatility we may well now see markets trade sideways until this afternoon when the release of US PMI figures may induce further market activity.
Please find a summary of this week’s economic calendar below:
02:00 Chinese NBS Manufacturing PMI
07:00 UK Nationwide Housing Prices
09:28 UK Markit Manufacturing PMI
15:00 US Construction Spending
15:00 US ISM Manufacturing PMI
15:00 US ISM Prices Paid
19:00 US Fed Interest Rate Decision
19:00 US Fed’s Monetary Policy Statement and press conference
02:45 Chinese HSBC Manufacturing PMI
08:48 French Markit Manufacturing PMI
08:53 German Markit Manufacturing PMI
08:58 Euro Zone Markit Manufacturing PMI
09:30 UK PMI Construction
12:45 ECB Interest Rate Decision
13:30 ECB Monetary policy statement and press conference
13:30 US Initial Jobless Claims
13:30 US Trade Balance
02:00 Chinese Non-manufacturing PMI
09:28 UK Markit Services PMI
10:00 EU Producer Price Index
13:30 US Nonfarm Payrolls
13:30 US Unemployment Rate