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.
Sterling has recovered some of its losses against the Euro this morning following weak GDP data released across Europe. After initially trading flat, GBP/EUR began its ascent following the release of German GDP DATA at 7:00 GMT which confirmed the German economy had contracted by -0.6%. The pair spiked to 1.1590 immediately following the release, before continuing its climb to a daily high of 1.1646. This now puts the pair within sight of a potential target level of 1.1722, a price range where there is substantial resistance.
EU GDP figures were not any prettier either this morning, as the Eurozone recorded a GDP contraction of -0.6% also. This data also helped add further impetus to the Pounds advance against the common currency. The European GDP data hurt the Euro right across the board this morning, with EUR/USD having dropped over a cent in the space of three hours, falling to a daily low of 1.3318.
Attention is now likely to turn to the US session this afternoon where we will see the release of US jobless claims figures. Whilst EUR/USD has been trading consistently downwards this morning, contrastingly we have seen sporadic movements in cable as the pair has been pulled following the economic data from Europe. That said, sentiment towards the pair still remains bearish with 1.5268 remaining a key target level, which should it be tested, could signal a significant downtrend.
Looking ahead to tomorrow, UK Retail Sales figures are due out at 9:30 GMT and are expected to improve from the previous month, potentially aiding the Pound in recouping some of its recent losses. However, make no mistake that the focus tomorrow will well and truly be placed on the G20 meeting, which is set to be a rather contentious affair. The threat of global foreign exchange war is likely to be top of the agenda, with Japans monetary policies likely to feature heavily also. Due to this, Japan may have actually welcomed the data today that showed it remained stuck in recession last quarter, adding to Japanese officials arsenals further ahead of the G20 showdown tomorrow.
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.
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.
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.
The Euro strengthened to a three week high against the Dollar and a month high against Sterling yesterday as optimism grows that a deal on Greece will be reached. Considering that a Greek default, bankruptcy and inescapable exit from the Euro would otherwise be inevitable, an agreement to extend financial aid to Greece seems to be guaranteed, as does a continuation of the Eurozone debt crisis merry-go-round.
After putting up substantial resistance to altering the current Greek target for a debt to GDP ratio of 120% by 2020, the International Monetary Fund has softened its stance and is said to be willing to lessen the target to 124%, a figure still considered viable. This will still leave a gap which is believed to be around 10 billion Euros, a hole that will need to be plugged and the mechanics of how this will be done are still to debated, but this is likely to be easily overcome.
Trading is relatively flat this morning following the release of German GDP and IFO Business Climate figures, as well as UK Mortgage Approvals. The data released so far has been positive across the board which has kept trading relatively flat, apart from a few minor spikes following the immediate release of the figures. The Pound is currently trading close to 1.2342 against the Euro and the rate is continuing to hover at this level where the Pound has found a reasonable amount of support. Should Sterling drop through this, the next level of stiff support for the pound is at 1.2248.
We could also see the Pound drop back off against the Dollar later today, potentially falling back to 1.5911 which is 38.2% retracement of 1.5267 and 1.6309, a level which was tested earlier in the week before the Pound eventually broke through. A break below 1.5911 would likely see support at 1.5882 being reached, with 50% retracement at 1.5788 being targeted after that should the decline continue.
With little more economic data due out for the rest of the week, attention is now likely to turn to the European finance ministers meeting on Monday. As this will be the last meeting before Greece is set to run out of money, it is now expected, and almost certain, that an agreement will be reached and the next tranche of financial aid granted to Greece. Therefore, we could see substantial price movements on Monday, with the Euro likely to be bullish should an agreement on Greece be reached without discord.
EU leaders will meet today for a two-day summit over plans for a single supervision mechanism and banking union and the wider issues surrounding the Eurozone crisis. In the days leading up to the summit the Euro has appreciated in a climate of calmer European stock markets and lower borrowing costs for Greece and Spain. There has also been a significant effort from Germany to argue for greater European economic and fiscal integration. EURUSD currently trades at 1.31 and EURGBP is currently trading above 0.81p (1.23). GBPUSD has also tracked EURUSD higher and trades above 1.61 on the interbank market.
Despite the relative increase in positive sentiment surrounding the Euro, it must be remembered that the summit is being held against a very dark backdrop. Greece today is braced for its twentieth general strike in two years and Spanish premier Rajoy continues to drag his feet on Spain’s bailout request. Any bailout request is now anticipated in November after the Galician and Basque parliamentary elections held on October 21st. Whilst it should be noted Catalonian parliamentary elections are due to be held on November 25th. Full Catalonian independence is unlikely to happen soon, if at all, but any Catalan struggle for greater autonomy would damage confidence, at a time when Spain needs to reassure the bond markets and fellow EU members , that the central Spanish government has its problems in hand.
No formal announcements are expected on Greece or Spain but any leaked comments could cause volatility in the Euro.
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Today’s Bank of England Quarterly Inflation Report has suggested that UK inflation has peaked and is likely to fall sharply from its current rate of 5% (down from 5.25% in the previous month September) to 1.3% over two years. The Bank has also cut its UK economic growth forecasts to 1% for 2011 & 2012 but indicated growth should climb towards 3.1% in two years.
Both the outlook to economic growth and inflation are seen as unusually uncertain and much will depend on developments in the Eurozone, the Eurozone debt crisis posing the single biggest risk to the UK economy.
Current forecasts suggest that UK interest rates are likely to remain low for a prolonged period of time with the first interest rate hike from the Bank of England not expected until at least 2013 whilst the prospect of further Quantitative Easing remains a strong possibility.
The debt crisis continues in Europe with Italian 10 year debt trading back above the unsustainable level of 7% and the yield of Spanish government bonds back above 6%. Besides the usual suspects, debt market yields of France, Austria, Netherlands and Belgium have also risen sharply, hitting Euro era highs. Moreover, the spread between French and German 10 year debt has also hit a fresh high.
Clearly the debt crisis poses a significant threat to the value of the Euro, the Euro has been surprisingly resilient so far but over the medium term I would expect the Euro to fall against the US Dollar and Sterling.
On the interbank market the Pound is currently trading between 1.57-1.58 against the US Dollar and between 1.16-1.17 against the Euro.
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