Political agreement would not appear to be any closer in the US following President Obama’s State of the Union address last night. With the postponed fiscal cliff spending cut discussions due to re-emerge in the forthcoming weeks, markets will be hoping bipartisan agreement is easier to come by than it was in the run up to the new year deadline. Last night President Obama offered little in terms of initiatives that are likely to do much to help increase US growth, such as minimum wage increases and climate initiatives. However, when it came to deficit reduction the president was slightly more emphatic, stressing that whilst it is important; “deficit reduction alone is not an economic plan”. It would appear that the theme of political impasse is due to continue as discussions regarding spending cuts and tax hikes loom closer.
Elsewhere yesterday we saw confusion in the markets following contradictory statements released by the G7. Initially indicating that it was unconcerned with recent worries regarding the weakening Japanese Yen, the statement from the G7 seemingly appeared to accept Japans latest fiscal policy manoeuvring as a domestic issue. However this stance was contradicted soon after the initial statement was released, when a G7 official clarified the situation, expressing that the G7 was in fact concerned with Japans monetary policy and the statement had been directed at Tokyo. This led to a wide trading range yesterday for USD/JPY, as the pair bounced between 94.40 – 92.94. We may well see fluctuations in the Yen continue tomorrow as the Bank of Japan is due to release its interest rate decision and monetary policy statement in the morning.
Unsurprisingly Sterling is down against the Euro and the Dollar yet again this morning. After falling over night and during the early hours of this morning, BoE Governor Mervyn King’s speech following the Bank of England’s Quarterly Inflation Report offered no assistance in halting the decline. Despite Governor King insisting the UK economy was set to recover, his comments were shrouded in numerous caveats. Mainly these were that growth is going to take longer and be weaker than had originally hoped, and that inflation is likely to rise. Markets reacted negatively to the Governors speech, in which it was also disclosed that inflation is likely to remain above target as it is becoming increasingly difficult to bring CPI back to the targeted 2%. This lead to immediate downward spikes in both GBP/EUR and GBP/USD, as the pairs dropped as low as 1.1514 and 1.5533 respectively.
With little more economic data due to be released this afternoon, it’s more than likely we will see markets consolidate in preparation for tomorrow. GDP figures are due out across Europe tomorrow morning, with the majority of market focus being heavily placed on German and EU figures. Should these figures fall short of market expectations, this could well be a catalyst for Sterling to begin recovering some of its recent losses.
Sterling has had a pretty dismal start to the day this morning having had a simultaneous drop off against the Euro and the Greenback at 8:30am, with both pairs losing over half a cent in little over half an hour. Sterling has since levelled off and is currently holding against the Euro at 1.1637 and 1.5585 against the Dollar.
Earlier this morning we had UK housing data released by RICS which showed the Housing Price Balance dropped to -4% in January. Further UK data has just been released and isn’t too favourable either, with the UK Consumer Price Index remaining stagnant at 2.7%, and the Core Consumer Price Index falling marginally to 2.3% last month, down from 2.4%. The UK Producer Price Index met market consensus at 2.0% whilst UK PPI Core Output fell to 1.4% in January, capping off yet more negative data for the UK, something which seems to have become the norm since the turn of the year.
Sterling has continued to suffer on the back of consistently weak UK data and improved sentiment within the Euro Zone. Going forward the outlook doesn’t look any more promising for Sterling either. Long term charts for both GBP/USD and GBP/EUR indicate that risk is still to the downside with key resistance levels being potentially targeted at 1.5278 and 1.1223 respectively.
However, Sterling could well rebound should sentiment towards the Euro Zone begin to change, especially following the Pounds such severe and rapid losses over the last few weeks. With GDP figures due out across Europe on Thursday and Italian Prime Minister Elections drawing ever closer, potential for a decrease in the Euro remains significant. Furthermore, after the recent 18 month highs for the Euro against the Pound and the Dollar, the grumbles of European leaders with regards to the common currency’s current strength are becoming louder. This issue is also likely to be mentioned by ECB President Mario Draghi in his Speech today, which could well have an impact on GBP/EUR trading this afternoon.
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:
18:00 FOMC Yellen Speech
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
10:00 EU Industrial Production
10:30 BoE Quarterly Inflation Report
10:30 BoE’s Governor King Speech
13:30 US Retail Sales
03:00 BoJ Interest Rate Decision
07:00 German GDP
09:00 EU GDP
13:30 US Initial Jobless Claims
09:30 UK Retail Sales
14:15 US Industrial Production
14:55 US Reuters Consumer Sentiment
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.
Positive UK data released this morning fuelled a moderate rally in the Pound, albeit a very short lived one. UK Markit Services PMI showed a substantial rise to 51.5 in January and caused Cable to spike upwards immediately following the release before dropping back off to where it is now, trading flat for the day at 1.5750. Similarly GBP/EUR rose slightly following the UK PMI figures, however the pair has now weakened and Sterling’s decline has seemingly resumed, with the pair now trading at 1.1630.
The Euro has strengthened against both the Pound and the Dollar this morning following the release of PMI figures. Whilst UK PMI data showed a positive increase, Markit Services PMI results for Spain, Germany and the Euro Zone were also positive. However, this data was soon contradicted by EU Retail Sales figures which showed sales were down -3.4% in December. As market participants digest the figures, it would appear that they have not yet decided that Sterling is oversold or the Euro has appreciated too far. However, one must recall the comments made several weeks ago by Luxembourg Prime Minister Jean-Claude Juncker, who stated that the Euro is ‘dangerously high’ – if that observation was correct then, the Euro must now be in an extremely precarious situation.
Elsewhere this morning we saw the Reserve Bank of Australia commit to keeping interest rates at 3.0%. The Aussie Dollar dropped off against Sterling and the Greenback following the data release as RBA Governor Glenn Stevens gave an explicit indication that rates could well go lower in the future. Despite these comments, the outlook for the Australian economy would appear to be consistently improving as China’s rebounding growth continues to be confirmed. This morning the HSBC China Services PMI hit 54.0, up from 51.7 the previous month. GBPAUD currently trades at 1.5140.
The Euro has been slightly reined in this morning following several weeks of strengthening against both Sterling and the Dollar. There was no end in sight to Sterling’s weakening against the Euro last week after a combination of poor UK data and strong EU sentiment lead to the most substantial losses for GBP/EUR in over a year. However, this morning the Euro has weakened right across the board and it’s all thanks to politics.
Despite the number of positive data releases that have came out of the Eurozone over the last couple of weeks, there will have been few people who disagreed with German Finance Minister Wolfgang Schaeuble last Friday who commented that “the euro crisis is not over”. The first suggestions of this in the markets were seen this morning as borrowing costs rose across the region on the back of growing political uncertainty in Europe. Spanish Prime Minister Mariano Rajoy faces allegations of corruption, whilst Silvio Berlusconi has closed in on Italian front runner Pier Luigi Bersani.
This increased uncertainty within the Eurozone has seen Sterling strengthen against the Euro for the first time in weeks, hitting 1.1578 this morning, though the pair is still some way off the next key level of resistance at 1.1722. The Euro has also dropped off against the Dollar today, falling to 1.3560 at present and potentially targeting the next key level of support at 1.3487.
Please find a summary of this week’s economic calendar below:
Mariano Rajoy and Angela Merkel meeting
09:30 UK PMI Construction
09:30 EU Sentix Investor Confidence
10:00 EU Producer Price Index
15:00 US Factory Orders
00:30 Australian Trade Balance
01:45 Chinese HSBC Services PMI
03:30 Australian RBA Interest Rate Decision
08:53 German Markit Services PMI
08:58 EU Markit Services PMI
09:28 UK Markit Services PMI
10:00 EU Retail Sales
15:00 ISM Non-Manufacturing PMI
11:00 German Factory Orders
15:00 Canadian Ivey PMI
00:30 Australian Unemployment Rate
09:30 UK Goods Trade Balance
09:30 UK Industrial Production
09:30 UK Manufacturing Production
10:00 European Commission Growth Forecasts
11:00 German Industrial Production
12:00 UK Interest Rate Decision
12:45 ECB Interest Rate Decision
15:00 UK NIESR GDP Estimate
EU Council Meeting
01:00 Chinese Trade Balance
05:30 Chinese Consumer Price Index
05:30 Chinese Producer Price Index
07:00 German Trade Balance
13:30 US Trade Balance
Sterling hasn’t seen a week as bad as last week for a long, long time and the outlook doesn’t look any rosier either. Cable (GBP/USD) recorded a new six month low on Monday after dropping to 1.5674, and GBP/EUR has continued to fall, hitting a new twelve month low yesterday at 1.1618. Sterling is continuing to suffer following a number of negative data releases last week. All in the same week we saw substantially weaker than expected UK GDP figures of -0.3%, fears of a triple dip recession, and David Cameron confirming his commitment to a referendum on Britain’s membership within the EU, all of which contributed to increasing uncertainty surrounding the UK economy and therefore a weaker pound.
Sterling has suffered right across the board recently, weakening against all major currencies last week. However, the pound has suffered the most against the Euro as weak UK data combined with the ever improving sentiment regarding the condition of the Eurozone and Europe as a whole (mainly because of data confirming that Germany is still an economic powerhouse) has sent GBP/EUR into free-fall. The pair fell to, and held at, a key level of support of 1.1722 on Friday before breaking this level on Monday. The pairs decline has continued throughout this week and a new twelve month low was reached on Thursday, before the pair recovered slightly to its current level of 1.1650.
Cable has fared slightly better in the past few days after a similarly horrific drop last week and early this week. The pair is currently trading at 1.5790 after hitting a key level of support, and a six month low, of 1.5674 on Monday before bouncing back up. GBP/USD is likely to target the next key level of resistance at 1.5911, however should momentum turn back to the downside, we could well see the pair drop back off to below 1.5675.
We could see significant movement in the markets tomorrow as economic data will be released in China in the early hours of tomorrow morning. Chinese Manufacturing PMI figures could increase volatility due to the emphasis that is placed on the Chinese economy’s role in the global recovery. Tomorrow is also everybody’s favourite Friday of the month – Nonfarm Friday. US Nonfarm Payrolls will take on greater importance tomorrow after US GDP figures released yesterday surprised markets by showing that the world’s largest economy had contracted 0.1% in the final quarter of 2012.
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.
It would appear that the world is on the brink of war. Currency war that is. According to the Russian central bank we are anyway. The comments come following Japans recent commitment to devalue its currency by increasing monetary easing within the country, in an effort to increase the country’s global competitiveness. Whilst at first sight the comments from Russia may seem alarmist, they raise a good point. If Japan is going to commit themselves to a policy of currency devaluation, it would appear inevitable that other countries will follow suit.
This follows comments made yesterday by Luxembourg Prime Minister Jean-Claude Juncker, who described the Euro as “Dangerously High”. This sparked a Euro sell off which led to EUR/USD dropping off to 1.3261 this morning after reaching a high of 1.3403 on Monday, its highest point since February 2012. Similarly the Euro weakened against Sterling as GBP/EUR reached 1.2097 this morning. This followed the pairs fall to 1.2011 yesterday, which was its lowest point in nine months, as the Euro had continued to strengthen on the back of ECB President Mario Draghi’s press conference last Thursday.
Cable finally broke below 1.6030 this morning after having been held at that level for the previous two days. The pair went on to hit 1.6003, testing a key Fibonacci level at 1.6010, before rebounding back to 1.6030+. The pair is again currently trading on the six month upward trend line after having briefly broken through this late last week. Continued downward pressure on Sterling following the World Bank growth rate downgrade and David Cameron’s persistent attempt to renegotiate Britain’s EU membership could see Cable fall back to 1.5911.
EU economic data released this morning showed Consumer Price Index figures for the region remained constant at 2.2% for December, as had been expected. We may well see further movement in the Dollar this afternoon as CPI figures are released at 13:30 in the US, along with US Industrial Production at 14:15 and the Fed’s Beige book at 14:15.
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.