After the ECB unexpectedly cut rates last month in response to lower inflation figures, the euro has been on the back foot against both sterling and the dollar. Recently there has also been talk about negative deposit rates and whether the central bank will ease monetary policy further. Although the ECB still believe inflation is still well anchored to their medium to long term expectations, the possibility of these moves will limit a recovery for the euro.
The last US non-farm payroll figure reignited the tapering debate and opened a small window for a December taper. If the payrolls figure due this week follows suit, we might just see the Federal Reserve begin to cut back asset purchases this month. For now though, the market requires some significant positive US data in order to support the dollar and gauge the likely timing of the next policy move from the Fed.
Sterling regains ground
This month sterling has definitely kick started things in a better position and there is more hope that the pound may be able to retain this momentum against the euro in the coming weeks. Last month’s Services PMI number got the ball rolling, with the figure rising to 62.5, the sharpest increase in 16 years. The level of new business rose at record pace, and this encouraged investors to begin to buy sterling once again. The latest Manufacturing PMI also beat estimates and support continues to build for the pounds. The key driver behind sterling’s recent gains has been the BoE inflation report which expressed optimism about the UK recovery and opened the possibility of a rate rise in 2015. The monetary policy committee believe that unemployment
will reach 7% by the end of 2015, and that despite a surprisingly lower inflation number, price pressure in the medium term are still well anchored. The market has kept its focus on the possibility of a rate hike in 2015 and this has been the backbone of sterling’s momentum. It wasn’t too long ago when we saw cable breach 1.63 and the GBPEUR rate test the barrier of 1.20. PMI data this week will help to set the trend for sterling strength this month, and together with some strong unemployment data, the pound should be well supported.
GBP/EUR
More dovish talk from the ECB should keep sterling in control of GBPEUR
The ECB certainly had a hand in recent euro weakness. Eurozone inflation slowed to 0.7% y/y and this prompted an unexpected rate cut from the ECB. This move set the tone for the euro and it is unlikely that the euro will be making any major recovery soon. It recently came to light that the ECB discussed negative deposit rates, and although ECB President Draghi was quick to express that those talks had gone no further, ECB’s Hansson did say that the central bank still has room for further easing. The market seems to have adjusted to the prospect of looser monetary policy from the ECB however as long as this possibility remains those bearish euro investors will keep their finger over the sell button. The ECB have also said that the medium to long term inflation expectations are well anchored and based on this we doubt we will see another rate cut from the central bank when they meet this week.
A much better set of economic data could benefit the euro this month. Last week we saw German IFO data provided the euro with some temporary relief, highlighting investors thirst for such positive numbers. With the euro set to remain on the weaker side for a while yet, upside surprise on economic figures could provide the single currency with pockets of opportunity to build momentum and improve sentiment about the economic climate. Considering German Ifo was enough to push EURUSD back above 1.35, there are still some market participants ready to put their money in the euro when given a reason to. For now though, the UK economic backdrop is looking much more stable and with continued talk of loose monetary policy, coupled with uninspiring data, sterling looks set to control this rate in the month ahead.
GBP/USD
This month sterling has definitely kick started things in a better position and there is more hope that the pound may be able to retain this momentum against the euro in the coming weeks. Last month’s Services PMI number got the ball rolling, with the figure rising to 62.5, the sharpest increase in 16 years. The level of new business rose at record pace, and this encouraged investors to begin to buy sterling once again. The latest Manufacturing PMI also beat estimates and support continues to build for the pounds. The key driver behind sterling’s recent gains has been the BoE inflation report which expressed optimism about the UK recovery and opened the possibility of a rate rise in 2015. The monetary policy committee believe that unemployment
will reach 7% by the end of 2015, and that despite a surprisingly lower inflation number, price pressure in the medium term are still well anchored. The market has kept its focus on the possibility of a rate hike in 2015 and this has been the backbone of sterling’s momentum. It wasn’t too long ago when we saw cable breach 1.63 and the GBPEUR rate test the barrier of 1.20. PMI data this week will help to set the trend for sterling strength this month, and together with some strong unemployment data, the pound should be well supported.
More dovish talk from the ECB should keep sterling in control of GBPEUR
The ECB certainly had a hand in recent euro weakness. Eurozone inflation slowed to 0.7% y/y and this prompted an unexpected rate cut from the ECB. This move set the tone for the euro and it is unlikely that the euro will be making any major recovery soon. It recently came to light that the ECB discussed negative deposit rates, and although ECB President Draghi was quick to express that those talks had gone no further, ECB’s Hansson did say that the central bank still has room for further easing. The market seems to have adjusted to the prospect of looser monetary policy from the ECB however as long as this possibility remains those bearish euro investors will keep their finger over the sell button. The ECB have also said that the medium to long term inflation expectations are well anchored and based on this we doubt we will see another rate cut from the central bank when they meet this week.
A much better set of economic data could benefit the euro this month. Last week we saw German IFO data provided the euro with some temporary relief, highlighting investors thirst for such positive numbers. With the euro set to remain on the weaker side for a while yet, upside surprise on economic figures could provide the single currency with pockets of opportunity to build momentum and improve sentiment about the economic climate. Considering German Ifo was enough to push EURUSD back above 1.35, there are still some market participants ready to put their money in the euro when given a reason to. For now though, the UK economic backdrop is looking much more stable and with continued talk of loose monetary policy, coupled with uninspiring data, sterling looks set to control this rate in the month ahead.
GBP/USD
To taper or not to taper?
The tapering debate has been going on for months now, and after the Federal shutdown dampened expectations it could happen this year, the last employment report reopened the possibility of a December taper. We know that the Federal Reserve require more evidence of a strong US recovery in order to warrant a withdrawal of stimulus and therefore the employment report will be (as usual) a focal point, and will most probably set the trend for the month. After the last non-farm payrolls release surprised to the upside, any figure in line, or above estimates should increase speculation about the possibility of a reduction in stimulus beginning this month.
In recent sessions we have seen the dollar take a beating after US figures produced some mixed results. At this moment in time, investors are penalising the dollar for data that isn’t meeting expectations and also for the fact that the timing of tapering continues to be pushed back. We may see more of this in December, especially if non-farm payrolls disappoint. Looks like another month of data watch for the dollar.
The Fed chair nomination vote will also grab the market’s attention, and last month nominee Janet Yellen was questioned by the Senate Banking Committee. With the majority of the Senate democrats, Yellen only needs a few votes from republicans to secure her position as Chairwoman of the Federal Reserve. If the Fed decide to keep policy on hold for another month (which is likely), the market will then look to the end of the first quarter for the Fed to begin cutting back their asset purchases.
GBP/EUR: 1.2150
GBP/USD: 1.6210
EUR/USD: 1.3400
The tapering debate has been going on for months now, and after the Federal shutdown dampened expectations it could happen this year, the last employment report reopened the possibility of a December taper. We know that the Federal Reserve require more evidence of a strong US recovery in order to warrant a withdrawal of stimulus and therefore the employment report will be (as usual) a focal point, and will most probably set the trend for the month. After the last non-farm payrolls release surprised to the upside, any figure in line, or above estimates should increase speculation about the possibility of a reduction in stimulus beginning this month.
In recent sessions we have seen the dollar take a beating after US figures produced some mixed results. At this moment in time, investors are penalising the dollar for data that isn’t meeting expectations and also for the fact that the timing of tapering continues to be pushed back. We may see more of this in December, especially if non-farm payrolls disappoint. Looks like another month of data watch for the dollar.
The Fed chair nomination vote will also grab the market’s attention, and last month nominee Janet Yellen was questioned by the Senate Banking Committee. With the majority of the Senate democrats, Yellen only needs a few votes from republicans to secure her position as Chairwoman of the Federal Reserve. If the Fed decide to keep policy on hold for another month (which is likely), the market will then look to the end of the first quarter for the Fed to begin cutting back their asset purchases.
GBP/EUR: 1.2150
GBP/USD: 1.6210
EUR/USD: 1.3400
