Market News & Insights
1 October 2014

Disinflation Pushes EUR to Two Year lows

EUR/USD 1.2599
GBP/USD 1.6179
GBP/EUR 1.2845 (0.7786)
EUR/CHF 1.2056
GBP/CHF 1.5485
GBP/AUD 1.8561

A weaker than expected inflation print from the Eurozone once again saw the Euro trade to a fresh two year low against the USD, while European stocks rallied on the prospect of QE coming sooner than expected. The promise of additional stimulus from the ECB helped European equities post their longest quarterly winning streak since 2006. In the US the outlook in equities was less impressive with declines in the S&P following weaker than expected confidence figures as well as declines in housing data from Case-Schiller. In overnight trade Asian markets struggled to advance as tensions in Hong Kong continue with concerns of escalation as China enters a public holiday. The EUR is not the only currency the USD has been advancing against. The USD has rallied close to 9% against the JPY since July and yesterday breached the key psychological level of 110.0 for the first time since August 2008. The USD maintained dominance against the AUD following weaker than expected Aussie retail sales. The Russian ruble also fell to fresh lows following reports suggesting Russia would be placing capital controls in place in response to ongoing sanctions.

Yesterday’s weaker than expected inflation print for the Eurozone was on trend and pushed EURUSD to fresh two year lows below 1.2600. The extension below 1.2600 did not hold and we have since traded back above that level following some profit taking on the move lower. The base CPI inflation reading remained unchanged at .3% year on year but the slide in core inflation from .9% to .7% saw markets expectation rise the ECB would announce their QE program tomorrow, in a bid to tackle the deflationary environment that has gripped the region. With unemployment at 11.5% ( just below record highs) and Core CPI level at record lows there is justification for the ECB to push forward the timing of the asset purchases which they announced in last month’s meeting. Further data released this morning will cause concerns for the EUR with both French and German manufacturing PMI readings confirming contraction with prints below 50, while the Eurozone figure holds just above that level at 50.3, worse than the 50.5 expected. Calls and expectations for ECB action tomorrow continue to rise, but with effects of last month’s rate cuts yet to filter through , and the TLTRO just underway the risk to the current trend is if the ECB disappoint markets and simply just maintain current policy. There is still a lot to be known about any potential QE program, size, asset quality and duration all remain open to speculation.

The pound experienced little benefit from the pick up in Q2 GDP from .8% to .9%, the drop in EURUSD pulled GBPUSD lower as well despite the ONS suggesting the recession in the UK was not as low as previously reported. With the Eurozone struggling sceptics are questioning the impact on the UK and as such expectations of BOE policy tightening have been pushed further out. During summer Mark Carney and Co were commenting on their surprise markets had not priced in rate hikes for before year end which saw a massive adjustment but now, even post referendum the interest rate hike expectations have yet to pick up and are coming under increasing pressure. Today’s manufacturing PMI print from the UK was worse than expected at 51.6 vs 52.2, GBPUSD has failed to hold above 1.6200 thus far this week and the pre referendum below 1.6060 looks a reasonable target if data from the UK does not pick up.