Draghi fuels a major euro
rally
After some early weakness in the initial sessions of
2013, the euro has made some staggeringly strong gains in the past few days.
ECB President Draghi is primarily responsible for the move, quashing
speculation that the central bank will elect to cut interest rates again in the
coming months. The ECB was unanimous in its vote against a rate cut, a measure that
was hinted at in its December meeting.
Draghi celebrated the easing of pressures in the
eurozone financial system and whilst noting further likely weakness in the region’s
economy well into the first half of 2013, Draghi did predict calming conditions
would result in an upturn in growth later on in the year. IMF Chief Christine Lagarde
lent the euro some further support by corroborating this view this morning.
In the short-term though, eurozone growth data is likely
to remain weak. Only this morning we have had confirmation of an unexpected
contraction of industrial production in the region. However, unfortunately for
the GBP/EUR pair, the euro is not responding to weak eurozone figures at the
moment. The same cannot be said of sterling’s relationship to UK data.
More
doom and gloom for the UK economy
The UK economy is about as dark and gloomy as its
weather at present. Last week brought yet more evidence that the UK economy
contracted (the latest estimate is a 0.3% contraction). The week ahead is likely
to confirm that UK inflation remained at 2.7% last month, while Christmas spending
should produce an improved UK retail sales figure on Friday.
Nonetheless, sterling is likely to remain out of
favour until after the Q4 UK GDP figure is announced on Jan 25 but if the
current snowy weather continues, a bounce back into positive growth territory
may be delayed until later on in Q1.
Market
hoping for clarity on QE3 this evening
There has been no shortage of indications that within the Fed there
is plenty of support for discontinuing the central bank’s QE3 operations. The
hawks have had their say but Bernanke falls within the dovish camp and it would
be no surprise to see him adopt his customary cautious stance and fail to
signal an end to QE3 in 2013. This would not be good for the US dollar in the
short-term but expect plenty of volatility overnight either way, as the market hangs
on the Fed Chairman’s every word.
There is plenty of significant US economic data out this week, which
will be relevant to QE3 expectations. It’s a full calendar including consumer sentiment,
employment, housing, manufacturing and retail sales data. This will need to be
solid if the US dollar is to bounce back in the short-term.
End of week forecast
|
GBP /
EUR
|
1.1950
|
|
GBP /
USD
|
1.61
|
|
EUR /
USD
|
1.3450
|
|
GBP /
AUD
|
1.5350
|
|
|
|
Sterling is trading at a rather alarming (depending on
your interests) nine-month low of €1.2025. We maintain a positive outlook for
GBP/EUR as a whole but we did note downside risks in January, though admittedly
we did not anticipate such a drastic downside move.
Sterling continues to tread water above the $1.60
level and may continue to do so for a little while longer, though by the end of
Q1 2013 we do see this pair well below $1.60. For now, this pair trades half a
cent above this psychological threshold.
Richard Driver
Currency Analyst
Caxton FX
