GBP/EUR 1.2799 (0.7813)
Many of you will just be returning from the Christmas break today and there will be some currency crosses that will be at surprising levels. The most notable moves over the Christmas and new year period came across USD pairs as the greenback reign has continued into 2015 with the Dollar index rallying to 11 year highs, most notable will be the drop in EURUSD below 1.2000 as EURUSD fell to fresh 9 year lows towards 1.1950, GBPUSD also faced selling pressures dropping from around 1.5500 to lows just below 1.5200. EURGBP dropped back towards .7750 without pushing any lower and currently trades back above .7800. While the strong USD trend has continued into 2015 we do have to be somewhat cautious over recent moves, made in light trading conditions where most data was limited.
The EUR opened the year under pressure with EURUSD falling close to nine year lows as speculation the ECB will expand stimulus in order to prevent deflation as the Eurozone economy continues to struggle to grow. It is expected the ECB will formally announce large scale bond purchases and all eyes will be on the ECB’s next policy meeting on Jan 22nd. Elsewhere over the Christmas break political instability has returned to Greece as political parties begin an election campaign, the popularity of anti austerity movements causing concerns for the single currency. On the data front there have been few surprises during the holiday period, PMI data from the Eurozone was generally weaker but we have come to expect low readings from Eurozone data at this stage. German CPI inflation data crosses the wires into this afternoon and while a marginal up-tick in inflation is expected, the big picture for the single currency remains focused on potential for the ECB to announce additional easing, time is running out for the ECB to act, and pressure continues to the downside for the Euro.
Demand continues for the USD and the dollar is benefiting on two fronts, the US recovery continues and USD traders are betting on a stronger US interest rate environment as the FOMC are beginning their path to raise interest rates. Meanwhile elsewhere in the world there are growth concerns, this is leading to further USD demand via its safe haven status as higher yielding EM currencies face selling pressures. Data from the US has not been plain sailing however, manufacturing was lower than expected through November but overall US data would signal continued out performance from the US versus its closest peers which is really the main separating factor and recent USD performance. We will be looking for further evidence of this in Friday’s labour market report, with the minutes from Decembers FOMC meeting due for release on Wednesday evening also worthy of additional attention.
The pound has been weaker to start the new year following a weaker than expected Manufacturing PMI, manufacturing output slowed through December in the UK but this is against the grain of UK data outperforming versus estimates over the last quarter. In fact the weakness in GBP against the USD appears well over done at this stage, GBPUSD has tended to move to the extreme of its ranges but for now, and despite apparent concerns on Europe impacting the UK, growth estimates for UK growth remain consistent and the BOE insist their next step will be policy tightening, not loosening. With that in mind the BOE are due to convene on Thursday, no change is expected from the MPC this month. Other key points to watch out for are services and composite PMI readings on Tuesday, and industrial and manufacturing production data due on Friday.