GBP/EUR 1.2532 (0.7989)
It has been a curious start to the week this week, on one hand global growth continues to be a concern, oil prices continue to slide, Russia has taken further steps to try halt the depreciation of the Ruble by raising the interest rates by a further 650 bps, global stocks continue to face selling pressures and fear/concern appears to be a more dominant theme – on the other hand markets are gearing up for the final FOMC meeting of the year with many expecting the Fed to remove the “considerable time” phrase from their policy statement, with reference to the time frame before they may look to raise interest rates. In early trading thus far this week the USD has been little changed, if anything it has been trading on the weak side, while the JPY has been an out-performer benefiting from risk aversion. GBPUSD rejected back from last week’s close towards 1.5750. It is also worth noting that markets carry the ability to provide some unexplained moves ahead of Christmas, with year-end corporate flows coming up against a quieter speculative markets as traders shut up shop into the year end.
Data was on the light side from the UK yesterday but the pound has been trading weaker to begin the week, EURGBP is over 1% higher from Friday’s lows while GBPUSD was down 1% at one stage in trading yesterday, the lack of major data points yesterday has us looking towards today’s calendar and the release of UK CPI carries with it the potential to move GBP pairs further. Much of the pound’s recent weakness has stemmed from low inflation expectations impacting the outlook for UK rate hikes, despite much of the other data from the UK remaining relatively firm. Year on year inflation is expected to fall to 1.2% today which is in line with the five year low printed in September. Currently the inflation outlook is rather downbeat and the headline figure is expected to fall below 1% before picking up through next year, with expectations so low and futures markets suggesting a UK rate hike in Q4 2015, a stronger inflation reading carries the ability to lift GBP pairs.
There is also PMI data due across the wires from the Eurozone and thus far prints have been mixed, the preliminary releases saw manufacturing in France contract further, while services were stronger than expected, in Germany manufacturing was stronger and services weaker than expected, while the Eurozone composite figure was also marginally firmer. This has put the EUR on a firmer footing thus far this morning with EURUSD once again looking at testing towards 1.2500 and EURGBP trading just below the .8000 figure. As always recently any bout of EUR strength has been sold into these key levels and we remain cautious of any EUR strength given the bigger picture across the Eurozone and the prospects for additional ECB easing. German economic sentiment data crosses the wires mid morning.
In the US the Markit Manufacturing PMI print for December crosses the wires with growth expected to have expanded further. Larger risk themes will likely dominate USD flows ahead of tomorrow’s final FOMC meeting before year end, the removal of “considerable time” rhetoric ahead the new year will likely see markets shaping up for a 2015 rate hike, sooner than is currently expected which should only lead to further USD strength in 2015.