Bernanke holds fire on QE3...for now
Last Friday saw Ben Bernanke give his Jackson Hole speech, at which the Fed Chairman ushered in QE2 last year. Many had high hopes for indications of a third programme of monetary easing this time around, but were disappointed. It is clear though that the market has not given up on the Fed pulling the trigger at some point. Nor should it, if US data continues on its current path, then there can be no doubt that the Fed’s hand will be forced on the issue. US consumer confidence data this afternoon was incredibly poor, hitting its lowest point in over two years, at which point the US economy was deep in recession. The signs are all there and we remain bearish on the dollar in the longer-term, though safe-haven flows have been plentiful today.
Tonight’s Fed’s meeting minutes are unlikely to reveal much we don’t already know, further easing is not quite necessary at present but the Fed will act accordingly if US data continues to disappoint. Many will be turning their heads towards next month’s Fed meeting.
Friday also saw the release of the all-important quarterly US growth figure, which undershot consensus forecasts to show 1.0% growth (annualised). This week’s major release is the monthly update from the US labour market, a poor figure here will certainly increase QE3 bets.
Sterling on the back foot amid improved risk appetite
Sterling has performed well in recent weeks, benefiting from increased safe-haven appeal but risk appetite has improved in recent sessions. Global stocks are recovering and safe-haven flows are being redirected from the pound.
This week brings the monthly growth updates from the UK manufacturing, construction and services sectors. The services sector spearheaded growth last month and the same will need to be true this time if concerns of further UK quantitative easing are to be kept at bay.
Euro trading strongly despite usual issues
We have seen fairly weak demand for Italian debt at an auction today, suggesting that it could be the subject of the next episode in the eurozone debt saga. The issue of demands from Finland for collateral in return for Greek aid has re-entered the headlines today, which has put the single currency under pressure today.
Nonetheless, the euro is back at a seven week high against an out-of-favour pound, and is towards the higher-end of its range against the dollar. As ever, Asian investment is keeping the euro fairly well-bid.
On the downside for the euro though, the ECB interest rate outlook has come into question. With data last week revealing a further slowdown in the eurozone (though not as bad as many expected), speculation is growing that we may see interest rate cuts in coming months. Our bet is that this speculation underestimates just how hawkish the ECB is and will continue to be.
Sterling is trading under €1.13 and under $1.63 this afternoon. This GBP/USD level looks a little too weak and we could see it bounce back in coming sessions. Against the euro, sterling looks a little more vulnerable but losses below €1.12 look a stretch.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.64
EUR / USD 1.45
GBP / AUD 1.5150
Richard Driver
Currency Analyst – Caxton FX
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