GBP/EUR 1.2157 (0.8224)
The USD index reached close to six month highs last week following the Fed decision to continue with their current pace of tapering at $10bln per month. A pick up in global risk aversion also helped the USD as contagion concerns rippled through EM markets causing heavy selling in EM asset markets and putting pressure on EM central banks to act to maintain currency valuations.
The EUR has been finding it difficult to hold early January gains and has fallen to two month lows against the USD. This week is unlikely to give the single currency a lift despite data today due to show Manufacturing is close to 32 month highs in Germany and across the single currency region. The bigger concern for the EUR should now be anaemic inflation trends and what this will mean for the ECB. Inflation continues to decline and with the IMF’s 20% chance of deflation in the region looking increasingly likely month on month, with many nations already experiencing deflation, calls are increasing for the ECB to act, will this Thursday’s meeting give us some clarity?
GBPUSD has broken back below its seven month uptrend support level, this could finally signal a reversal in one of the strongest G10 trends from 2013. A test back towards 1.6300 looks inevitable at this stage but the key level, just above 1.6200 may be tested if the BOE look to re-address their forward guidance mandate. BOE rhetoric recently has been supportive of lower rates for a prolonged period of time, despite their unemployment target almost being reached.
We may get what we are looking for should the BOE release a policy statement after Thursday’s MPC meeting, however if they fail to do that we will likely have to wait for the February 12th inflation report for further guidance on the BOE’s outlook. Speculation is building that the BOE will maintain their dovish stance especially with inflation falling in line. Ahead of us this morning UK manufacturing data is on tap, following a weaker than expected reading for December, the January figure is expected to be unchanged at 57.3.
In the US the focus will turn to the ISM manufacturing release. We expect the report to show that the pace of manufacturing growth has slowed for the second consecutive month in January. US releases have tended to be miss to the downside for December and January and whilst this may simply be down the impact of severe weather in the US it can still carry implication for the USD in the short term, especially if it is felt this is fallout from the taper effect. Fridays NFP release will likely carry larger implications for the USD however, December’s disastrous figures saw the USD face some selling pressure, forecast expect the US jobs market to bounce back with 175K jobs added in January, should this miss again the Feds taper policy may well come under stricter scrutiny.