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
Movements in Sterling have been relatively restrained this week, with little economic data having been released attention is being focussed on GDP figures due out in the UK and the US at the end of the week. Market expectations are for a 0.1% increase in UK GDP when the figures are released tomorrow morning, however with potential increments being so fine, the margin for error is miniscule. Whatever the result, the effect on the UK economy is likely to be just as miniscule in the short term, however the opposite couldn’t be more true for the UK coalition government and their religious adherence to “Plan A”.
Should the figures tomorrow show that the UK has slipped into recession for the third time in as many years, the subsequent pressure heaped upon George Osborne could be enough to bring the Chancellor to tears for the second time in as many weeks. Furthermore, weak GDP figures would add emphasis to Christine Lagarde’s comments last week that Mr Osborne should consider rethinking the government’s austerity strategy. The comments last week were a surprising contradiction of the IMF’s long standing support for the UK’s deficit reduction strategy, however perhaps after over two years of trying and little signs of improvement in the economy, even the IMF are now beginning to think that a change of plan may be necessary for the UK government.
With very little economic data due out today, attention has turned to Germany this morning where business environment surveys have been released. The German IFO Business Climate and IFO Current Assessment figures showed falls in April to 104.4 and 107.2 respectively. The euro weakened following the immediate release of this data as the figures were substantially below market expectations. GBP/EUR rose to a daily high of 1.1763 before falling back to 1.1739, whilst EUR/USD recovered to 1.2994 after having dropped off to 1.2954 immediately after the IFO data release. Little activity is expected in the markets this afternoon until US Durable Goods figures are released which could stoke some movement, however volatility is likely to be restricted as market participants await the key GDP data from the UK tomorrow and the US on Friday.
Please find a summary of this week’s economic calendar below:
09:30 UK GDP
13:30 US Initial Jobless Claims
23:45 New Zealand Trade Balance
00:30 Japanese Consumer Price Index
04:00 Japanese Interest Rate Decision
13:30 US GDP
13:30 US Personal Consumption Expenditures Prices
14:55 US Reuters/Michigan Consumer Sentiment Index
The wait goes on. The wait for positive data concerning the UK economy that is. Whilst it is to be expected that data releases concerning a country’s economic performance will naturally vary from week to week, and month to month, it is far from the ordinary for a country, and in this case the UK, to record consistently negative data for several months. Just as these data releases are out of the ordinary, correspondingly so are the rates.
As we have been reporting for the past few months, since the turn of the year Sterling has weakened at an alarming rate. After having appeared to level off against both the Euro and the Dollar in recent days, hopes had emerged that the Pound may well recover some of its losses. However these hopes were quashed this morning following the release of PMI data across Europe. The UK was expected to record a figure of 51.0 and consequently markets reacted negatively when the UK’s actual figure of 47.9 was released. With positive PMI figures released for the majority of the other European countries this morning, this led to a significant sell off in the Pound. Sterling hit daily lows of 1.1514 and 1.5014 against the Euro and the Dollar respectively immediately following the release, before levelling off.
This afternoon we will see a number data releases from the US including PMI, Mortgage Approvals, Personal Income, and Personal Consumption figures. These figures could stoke further movement in the Dollar which forced Cable to a new eighteen month low earlier today.
The Pound has fallen further this morning as the financial markets react to the loss of the UK’s AAA credit rating. Moody’s cut the UK’s credit rating from AAA to AA1 citing ‘challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament’. This is the first such credit rating downgrade since 1978. The Pound is now trading at its lowest level against the Euro since October 2011 and the lowest level against the US Dollar since July 2010. The Pound has depreciated 6% this year and further falls in Sterling are possible.
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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.
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.
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.
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.