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.
Yesterday saw substantial volatility within the markets courtesy of mixed PMI figures released in Europe and a tacit message from Mario Draghi suggesting that the European recovery will take longer than expected. Whilst the BOE’s decision to maintain interest rates and quantitative easing levels at their current level had little impact upon the markets, German and Euro Zone PMI figures falling short of expectations and Mario Draghi’s negative assessment of Europe’s recovery caused a substantial move in the euro throughout the day whilst GBP/EUR eventually closed flat at 1.1777. The dollar experienced similar levels of volatility yesterday following higher than expected US Initial Jobless Claims as GBP/USD closed near a six week high of 1.5225 and EUR/USD also closed up at 1.2926.
Despite the relatively high levels of volatility that were witnessed on both sides of the pond yesterday, the largest market movements were attributed to economic news coming out of Asia. In the early hours of yesterday morning the Bank of Japan committed to a substantial bond buying program worth over half a trillion dollars per year – the size of which took markets by surprise. Unsurprisingly however this lead to the most considerable Yen sell off that we have seen for quite some time with the Yen closing down across the board. The Yen touched a near three and a half year low yesterday against the Dollar and has now pushed above this level with USD/JPY reaching 97.15 so far this morning, whilst GBP/JPY has hit 146.67.
This morning we have seen relatively minor movements in the markets following the release of Euro Zone Retail Sales and German Factory Orders, both of which came out above expectations. Market participants are likely regrouping following yesterday’s volatile trading environment and preparing themselves for the release of the US Nonfarm Payrolls later today. Following the weaker than expected US data yesterday, another subpar performance today for the US jobs market could cause the Greenback to drop off even further, with GBP/USD potentially reach 1.53+.
Unemployment figures released this morning showed that the UK ILO Unemployment Rate rose marginally to 7.8% from 7.7%, whilst the UK Claimant Count Change improved to -12.5K for the third month in a row. However, this slight glimmer of hope that the UK economy may actually be starting to show signs of recovery, offered little help to the Pound this morning which has taken somewhat of a battering following the release of the BoE minutes.
Sterling plummeted at 9:30 GMT against both the Euro and the Dollar, following the release of BoE minutes which confirmed that three of the nine MPC members favoured an increase in stimulus at this month’s policy meeting. Paul Fisher, David Miles and BoE Governor, Sir Mervyn King were the members who were voted down, though this does suggests that the committee is potentially warming to the idea of additional stimulus in order to help revive the economy. This is something we may well see in the coming months which, whilst potentially helping the economy, certainly wouldn’t do the Pound any favours.
GBP/EUR dropped over a cent in the space of twenty minutes after the BoE minutes were released, before levelling out to its current trading level of 1.1430. Cable faired similarly, as the pair dropped from 1.5439 to a daily low of 1.5294 in less than an hour, and is currently trading at 1.5308. The GBP/EUR charts aren’t looking too favourable for the Pound either and the general outlook is rather bearish for Sterling at the moment. However, the Euro Zone has by no means ‘recovered’ and with elections in Italy coming up and rumblings from a number of European leaders that the Euro is far too high at present (potential for EU interest rate cuts), it would appear that there remains significant scope for GBP/EUR to recover at some point, the question is when.
The G20 followed a similar line over the weekend to the one that was adopted by the G7 earlier last week, as finance ministers of the world’s largest economies commented in a joint statement: “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes”. The fact that the statement was of a rather generic nature, and importantly didn’t specifically refer to Japan, has effectively given Japan the green light to continue its unofficial policy of Yen depreciation, and has potentially opened the door for other countries to follow suit. This lead to the Yen dropping against the Dollar yet again this morning as USD/JPY hit 94.21, nearing the low it reached on February 11th of 94.46, its lowest level in over two and half years.
Some ministers have begun to comment on the potential for ‘currency wars’ in recent weeks as countries actively pursue a weaker currency. However, Japan has reaffirmed today that its monetary easing policies are specifically targeted at ending deflation rather than purposefully trying to devalue the Yen in order to improve the countries global competitiveness, though currency devaluation coincidentally will be an inevitable side effect of such policies. However leading economist, and Nobel Prize winner, Paul Krugman, notes that the currency war issue is “a misconception and it would be a very bad thing if policy makers take it seriously”, and that “the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy”.
Sterling is not fairing any better this morning following the G20 meeting as GBP/EUR is currently trading at 1.1585, having slightly rebounded from a daily low of 1.1562. Similarly Cable has also rebounded from a seven month low of 1.5437 this morning and is currently trading at 1.5470. Whilst the Pounds decline has made imports more expensive over the last month, BoE Monetary Policy Committee member Martin Weale commented last week that the weakening Pound would help improve Britain’s export prospects.
It is Presidents day in the US today, a Public holiday which means trading volumes will be lower and the economic calendar if rather light. However, this afternoon ECB president Mario Draghi will be making a speech. Market participants will be keen to see whether Mr Draghi will make any reference to a potential future interest rate cut. Such a move, which could well happen within the next few months as looser monetary policies have now seemingly been tacitly warranted by the G20, would help Sterling recover some of its recent losses against the common currency.
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.
Markets are relatively flat this morning as participants wait and see what will be the outcome of two major pieces of economic data due out this afternoon. First we will see the Bank of England release its decision at 12:00 GMT on whether or not to alter interest rates or their asset purchase program. Whilst both of these are expected to remain as they are, market participants look keen to wait until these decisions are confirmed before taking a position within the markets.
A little later this afternoon we will see an ECB Monetary Policy Statement and press conference at 13:30 GMT. As in the UK, the ECB are expected to keep interest rates on hold at their record low of 0.75%. Whilst the Eurozone appears to have been stabilizing recently, there has however been no spectacular data release to suggest that a rate change at present would be warranted.
Elsewhere today we have seen commodity currencies react favourably to the positive data released in China this morning. Figures show that the Chinese Trade Balance rose substantially in December, reaching 31.6B for the month, well above market expectations of 19.7B. The Australian Dollar rose to its highest point against the Japanese Yen in four years following the data release, and is currently trading at AUD/JPY 93.23. The Aussie Dollar was also aided by Japanese Prime Minister Shinzo Abe, who has called for the Bank of Japan to raise inflation targets to 2%, weakening the Yen right across the board.
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.
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
Deal. A deal has definitely been done, but was it a good one? Let alone good, was there even any point to it? These are the questions that market experts are starting to ask as doubts grow as to whether this deal will actually do anything to solve Greece’s long term national debt problem.
European finance ministers last night, as expected, agreed to release the next tranche of financial aid to Greece. The meagre sum of €43.7 billion Euros worth of loans starts to be paid to the debt ridden country from December. It is believed that this will help plug the gap in the country’s finances until the end of 2014, however for any true progress to be made many market analysts are calling for at least some of Greece’s outstanding debt to be written down. It is becoming ever more apparent that simply applying increasingly stringent austerity is not having the desired effect, in fact it could even be exacerbating the problem.
Closer to home, yesterday George Osborne announced who is set to succeed Sir Mervyn King as Governor of the Bank of England next year. The decision to name Mark Carney, currently the governor of the Canadian central bank, seems to have taken most people by surprise. However, whilst some of the decisions that Mr Osborne has made whilst Chancellor of the Exchequer have come under scrutiny, this one seems to have been well received and was even deserving of approval from his opposite number, shadow Chancellor Ed Balls. Mr Carney has been widely commended during his time at the Canadian central bank, where he has successfully navigated Canada through some of the toughest global economic conditions in living memory, with Canada fairing much better than many other countries during this time.
This morning Sterling improved to a morning high of 1.2384 against the Euro, whilst the Dollar has also risen against the Euro, with EUR/USD hitting 1.2935. The weakening Euro comes on the back of the agreement made last night between European finance meetings, as markets, whilst relieved a deal was made, are concerned that it will do little to stabilise Greece’s finances in the long term. We could see further movements this afternoon as figures for US Durable Goods Orders are released. Positive results could see the Dollar appreciate further and potentially compound the weakening Euro.
Christmas came early this morning for the UK as GDP figures confirmed, somewhat emphatically, that the UK has officially come out of recession. David Cameron declared yesterday during a lively Prime Minister Questions, at the end of a passionate statement regarding the strengthening UK economy to opposition leader Ed Milliband, that ‘the good news will keep coming’. Despite this statement, even the Prime Minister himself must have been pleasantly surprised this morning when the data was officially released, confirming a UK GDP Q3 increase of 1%, beating market expectations of 0.6%. This positive sentiment was conveyed in the markets as GBP/EUR jumped 35 pips in the ten minutes following the release. A large part of this increase is likely to be due to the effect the Olympics had on the economy as Olympic Games ticket sales helped revive growth. These results, whilst positive, should be considered with cautious optimism. Bank of England Governor Mervyn King commented yesterday that whilst the UK economy continues to recover, it is proceeding to do so at a ‘slow and uncertain’ pace. All of this means that the Bank of England’s Monetary Policy Committee will have a lot to think about when they meet on the 8th November to decide the UK’s monetary policy.
The economic data this morning from the UK contrasts drastically to the consistently negative information that was released yesterday morning in Europe. Between eight and nine AM yesterday nearly ten pieces of individual European economic data was released with each one being negative and failing to meet market expectations. This quite clearly hit the Euro as we saw nearly one cent fall off both EUR/GBP and EUR/USD following the data release. European leaders offered little help for the Euro either, as has come to be expected, following European Central Bank President Mario Draghi’s meeting with German lawmakers. Truth be told little was expected to come from this meeting which was more of a wooing campaign for Mr Draghi who is keen to gain the support of the German public to ensure the countries commitment to the ECB’s bond buying program which is hoped will help sure up the Eurozone.