GBP/EUR 1.2060 (0.8293)
Uncertainty appears to be dominating global markets at the minute, risk appetite has been subdued by global market growth concerns, partly stemming from the Argentinian Peso’s 15 decline against the USD on Thursday. The FOMC meet this week to discuss US policy and while the USD appears firmer against EM currencies, it has been struggling against its most liquid trading counterparts. On Friday we had comments from the BOE’s Mark Carney, suggesting they may look to change their forward guidance policy and over the weekend the ECB’s Mario Draghi said there have been signs of a dramatic improvement in the Eurozone, and talked down deflation risks.
There is certainly concern stemming from EM markets and this has fed right through to global markets with global stock indices facing selling pressures last week. The devaluation on the Argentinian peso, weak PMI and GDP indicators from China all increasing concerns that have seen the S&P 500, STOXX and the FTSE amongst others, erase their December and January gains.
On Friday BOE governor Carney spoke at the World Economic Forum in Davos and his comments had a notably dovish tone. Carney said that the “…degree of stimulus will remain exceptional for some time” and indicated that policy makers will have the ability to update their guidance on interest rates, especially in the face of a “more benign inflation outlook”. Many have brought forward their guidance on UK rate hikes, some as soon as Q4 2014, Carney’s words would suggest this may be a bit premature and next month’s Inflation report may well dampen interest rate hike speculation further.
There has been some recent speculation we may see further rates cuts in the Eurozone, while we fail to see any benefit from further rates cuts the recent rise in short term funding in the region coupled with a reduction in liquid caused some to speculate. Euribor rose to .36% vs the ECB refinance rate of .25% at a time when banks continue to repay their LTRO loans to the ECB, reducing liquidity. We spoke before about the diminishing returns of such a rate cut and ECB member Klaas said that such pressure would not warrant a rate reduction. Draghi was also peaking over the weekend in Davos highlighting recent improvements in the region.
The major event of the week will come from the US as the FOMC begin their two day meeting tomorrow with the policy statement released on Wednesday evening. Despite a weaker than expected December jobs report general data from the US has been consistent with a slow recovery and we expect the Fed to continue with a $10bln per month taper, helping the USD to maintain its 2014 bullish trend. This will be Janet Yellen’s first meeting at the helm, in the past she has been supportive of a lower unemployment threshold so any comments or change in tone around this issue may negatively impact the USD.
Today’s calendar is relatively light but the European session will give us some German confidence data in the form of the IFO business climate indicator. The trend here has been higher and with German confidence remaining firm we expect this to continue. US home sales data headlines a quiet US session, with an expected 1.9% decline in sales in December, although the pace has slowed from November’s 2.1% decline.
Aside from the FOMC due Wednesday, tomorrow we have UK GDP, with US consumer confidence and Durable good sales. Thursday brings us US GDP with German Unemployment and finally on Friday we have Eurozone unemployment and inflation data.