Category Archives: Currency Updates

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

Calm Before the Storm

In reality this is most likely the calm before the calm. Markets are relatively flat this morning and they are unlikely to encounter too many shocks, or any storms, over the next week or two, provided the talks in the US regarding the fiscal cliff progress as expected. Should the initial stubborn stance, customarily adopted by both parties, not soften as the week progresses, then we could begin to see substantial movement within the markets as concern grows.

We start the week with very little economic data due out today and this theme will continue throughout the week, with relatively few pieces of key data being released in the run up to Christmas.

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

17.12.12
10:00 EU Labour Cost
14:00 US Net Long-Term TIC Flows
14:30 ECB President Draghi Speech

18.12.12
BOE Inflation Letter
09:30 UK Consumer Price Index
09:30 UK Producer Price Index
09:30 UK Retail Price Index

19.12.12
09:00 German IFO – Business Climate
09:00 German IFO – Current Assessment
09:30 UK Bank of England Minutes
13:30 US Housing Starts
13:30 UK Building Permits

20.12.12
07:00 German Producer Price Index
09:30 UK Retail Sales
13:30 US Gross Domestic Product
13:30 US Personal Consumption Expenditure Prices
15:00 US Existing Homes Sales Change
15:00 US Leading Indicator

21.12.12
09:30 UK Gross Domestic Product
09:30 UK Public Sector Net Borrowing
13:30 US Personal Income
13:30 US Personal Spending

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

I Got the Power

The European Central Bank has got the power. It has got the power to supervise. EU finance ministers, in the early hours of this morning, agreed to appoint the ECB as Europe’s single, all-encompassing, banking supervisor. The new supervisory body is scheduled to become fully operational by early 2014 and will be responsible for the oversight of approximately two hundred of the biggest banks in Europe, as well as smaller institutions where necessary.

The rhetoric coming out of Europe following this agreement has been pretty positive, as German Chancellor Angela Merkel commented: “The importance of the deal cannot be assessed too highly”. Considering the relatively turbulent year the Euro zone has experienced, and the criticism European leaders have received over their perceived lack of action and inability to compromise, today’s agreement is quite a scalp for EU leaders and it is hoped this could be a pivotal turning point in dealing with the region’s economic woes.

However, we have seen seemingly positive decisions reached before, only for deals to fall through due to an inability of EU leaders to deliver. Cleary now, cementing the legal framework for this body and ensuring its implementation, after what could be described as a slightly rushed agreement, is vital. Following this agreement, the path has now been paved for Eurozone finance ministers to be provided with the option of using the European Stability Mechanism (Eurozone bailout fund) to recapitalise banks directly, rather than through individual countries lending institutions as is currently the case, provided a unanimous request is made to the ECB to assume direct oversight of the institution.

Across the pond yesterday, as we expected, the Fed decided to keep US interest rates at 0.25%, however what was not expected was the Feds decision to confirm that any future rate movement would now be linked to economic indicators. Current interest rates are now set to remain as they are until unemployment falls to 6.5%, provided that inflation is not projected to rise above 2.5%.

Markets are relatively flat this morning, with only a small amount of movement in the Euro following the key deal reached regarding the ECB’s new supervisory role. GBP/EUR continues to trade sideways as it has been doing for last 3 months or so now. Sterling is currently at 1.2341 against the Euro, with hour charts suggesting that we could see a potential rise back to a key level of resistance at 1.2375 today. However, as markets continue to digest the news regarding the ECB, should sentiment towards Europe turn positive and the Euro strengthen, we could see GBP/EUR drop back to 1.2273.

With little economic data out this morning, the key focus for market participants today will come this afternoon as key economic data is released in the US. US Retail Sales and Producer Price Index figures will be released at 13:30 GMT and could be a catalyst for some movement in the Greenback, however any major movement over the next few weeks is very likely to be linked to news regarding the progress of fiscal cliff talks. After pushing up to a high of 1.6171 yesterday, GBP/USD has fallen back to, and is currently trading at, the key level of resistance that we discussed yesterday of 1.6124. Another break above this level today would be significantly bullish for GBP/USD.

Mark Webster

Agree to Disagree

Offers and counter offers were exchanged yesterday as President Barack Obama and House Speaker John Boehner spoke at length regarding how to deal with the fiscal cliff. Accounts differ on exactly what was achieved/agreed during this discussion, but it would appear that markets are optimistic that a deal on the fiscal cliff will be reached on time, before the January 1st deadline.

The Dollar has weakened this morning against Sterling and the Euro, suggesting the talks regarding the fiscal cliff are progressing well, or at the very least they are being perceived to do so. GBP/USD has breached a key level of resistance this morning, breaking through 1.6124, and the next key area to be tested is likely to be 1.6182. A break above this level could see a rise back to the twelve month high of 1.63+ and given the fact the pair are currently trading in an upward trend, this is a distinct possibility. However, failure to continue this advance could see a reversal back to 1.60.

Similarly the Euro has broken out of a key downward trend this week, for the second time in a month, and this is a clear indication that the Euro could strengthen further. However, any movement in the Euro is heavily dependent on how the Eurozone situation progresses and how well European finance leaders are able to deal with the ever continuing debt problems facing Greece.

Attention this afternoon will turn to the US as the Fed is due to make a decision on whether or not to keep interest rates at 0.25%. The Fed is expected to maintain its current rate and any variation would be a major surprise to the markets, which could potentially destabilise the economy and damage the already fragile recovery. However, the main focus will be on the Feds decision regarding its monthly asset purchase program. Operation Twist as it is currently known is due to come to an end this month and markets are waiting to see whether this will be continued through the medium of another QE program.
Please find a summary of key economic events this week:

12.12.12
07:00 German Consumer Price Index
07:00 German Harmonised Index of Consumer Prices
09:30 UK ILO Unemployment Rate
09:30 UK Claimant Count Change
10:00 EU Industrial Production
17:30 US Fed Interest Rate Decision
19:00 US FOMC Economic Projections
19:00 US Monthly Budget Statement
19:15 US Fed’s Monetary Policy Statement

13.12.12
09:00 ECB Monthly Report
13:30 US Initial Jobless Claims
13:30 US Producer Price Index
13:30 US Retail Sales
13:30 US Business Inventories

14.12.12
European Council Meeting
08:28 German Markit Manufacturing PMI
08:28 German Markit Services PMI
08:58 EU Markit Manufacturing PMI
08:58 EU Markit Services PMI
10:00 EU Consumer Price Index
10:00 EU Employment Change
13:30 US Consumer Price Index
14:00 US Markit Manufacturing PMI
14:15 US Industrial Production

BoE and ECB

The Euro has retreated today after the European Central Bank kept rates unchanged at 0.75% and slashed its growth forecasts for 2013. Projected Eurozone growth is now expected to range between -0.9% and +0.3% suggesting that it is more than likely that the Eurozone economy will contract next year.

In the UK, the Bank of England as expected kept interest rates at 0.50% and the Bank’s Quantitative Easing Asset Purchase Programme was also maintained at £375bn.

As a result the Pound is up against the Euro by nearly 1 cent and currently trades at 1.2395 (0.8068) and the Euro is down 1 cent against the US Dollar at 1.2980. The Pound trades relatively flat against the US Dollar currently at 1.6090 on the interbank market.

Matthew Porter 15:15 06/12/12

Autumn Statement

George Osborne, Chancellor of the Exchequer, this afternoon faced tough criticism from shadow chancellor Ed Balls, who declared the ‘Coalition’s economic credibility (is) in tatters’ and the UK is ‘falling behind in the global race’.

The Chancellor had to go into parliament today knowing that he was going to be in for a frosty reception during his Autumn Forecast Statement. Mr Osborne has known for a while, as has the rest of the world, that the UK recovery is going to take longer than was originally anticipated. However actually having to utter these words openly in front of parliament afforded the opposition a mouth-watering opportunity to unleash a scathing, and what has become customary, attack against the Chancellor and his plan on how to deal with deficit.
Despite the slanging match that has become very much the trademark of parliamentary debates ever since the coalition took power, the key points to take from George Osborne’s statement are:

-3p rise in fuel duty has been scrapped
-Potential for further cuts to councils
-Additional money for roads, public transport and schools

Following the Mr Osborne’s statement cable has remained relatively flat, whilst Sterling has dropped off slightly against the Euro, falling to a daily low of 1.2307.

Mark Webster

Go Euro, Go

Today we will see European Finance ministers meet once again to further sure up the current deal regarding Greece. Discussion is likely to focus on the proposed supervisory role for the European Central Bank. Whilst in theory the majority of European finance ministers would be in favour of such a position, it is when it comes to the ironing out of the fine details that there is the potential for disagreement. Notably, leaders of countries outside of the Eurozone have expressed concern that they could be treated as second tier members of the new supervisor, a situation that would clearly be untenable.

Despite the meetings taking place in Europe today and across the pond regarding the fiscal cliff, the Euro has continued to strengthen against Sterling and the Dollar on the back of the Greek debt agreement reached last week. The Euro has risen against both the Pound and Dollar today, with EUR/GBP hitting 0.8128 (GBP/EUR 1.23) and EUR/USD rising to 1.3107. Sterling has also risen against the Dollar today, hitting the key level of resistance at 1.6124 that was mentioned in yesterday’s blog. Cable is continuing to test this level and should it breakthrough, we could well see 1.63 targeted next, however substantial movement will be dependent on the progress of talks regarding the fiscal cliff.

Elsewhere the Reserve Bank of Australia has cut interest rates for the second time in three months. Interest rates have been cut to 3%, equal to the half century low set in 2009, as the Australian economy continues to battle with falling commodity prices and a strong currency. Despite the interest rate drop early this morning, the Aussie Dollar has fared well, buoyed by the positive Chinese data released yesterday and also potentially because of the fact that some market participants felt the rate could have been cut even further. GBP/AUD is currently trading at a daily low of 1.5373.

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

Obama Claus is Coming…

All President Obama wants for Christmas is a deal to be agreed on how to deal with the looming fiscal cliff, something that would be a welcomed present for many market participants also. The deadline is January 1st 2013. However, in a speech last night, President Obamas strong rhetoric suggested that if Republicans, and Democrats alike, behave for the next couple of weeks, a deal could be reached a week early.

Lloyd Blankfein, CEO of Goldman Sachs, stated that he believes the Presidents current plan regarding the fiscal cliff is ‘very credible’. It would appear that US governors are beginning to appreciate the importance of reaching an agreement sooner rather than later, and it would also seem that markets are beginning to believe in their elected officials. According to a Bloomberg Poll only 6% of investors now believe that US politicians will not reach some sort of agreement. As investors decisions become more and more headline driven it is more than likely we will a reasonable amount of movement in the Greenback in the run up to the New Year, with bias expected to be positive should a fiscal cliff agreement become anticipated.

The Dollar is trading relatively flat against Sterling this morning, however it has weakened against the Euro, as the Euro reached 1.2990, as investors become nervous in the run up to some key meetings today between Timothy Geithner, the US Treasury Secretary, and the four top leaders in Congress.

Mark Webster