GBP/EUR 1.2563 (0.7960)
The tone in markets yesterday remained subdued, equities in Europe continued their slump lower while the EUR also faced losses after a rout from peripheral debt saw increased demand for safe haven assets from the German bund to US treasuries. Equity markets in the US managed to finish the day higher, bolstered by comments from the St. Loius Fed president James Bullard, he suggested the Fed should delay the end of their bond purchase program in order to halt the decline in inflation expectations. In overnight markets there was little to support risk, stocks traded mostly lower while on the currency front the USD and JPY remained dominant amongst currency demand. FX market volatility has reached 8 month highs and with that we have seen a number of our clients looking for ways to protect against this increased volatility, as we get closer to year end we would expect this these requests to increase.
Since the post NFP lows EURUSD has been trading slowly higher, the EUR itself has actually been performing admirably, especially against a backdrop of weakening data, and even larger global growth concerns, much of which stems from the slowdown in Europe. Regular readers will know that this momentary respite in EUR weakness has likely been caused by the fact so much bad news had been priced into the EUR, the ECB’s failure to put a figure on QE left some possible upside for the single currency but in reality the ECB will have to act on scale if the European and global growth situation continues to deteriorate. It is important to remember that the ECB only started to shift to more accommodative policy in the last five months, well behind other major economies like the US, UK and even Japan, – for many this seems too little too late as the region still struggles with a dis-inflationary environment, the ECB’s failure to appease markets at the beginning of the month started the negative tone which has thus far prevailed through October.
With plenty of attention on the ECB and their potential QE program, today provides them an opportunity to clarify their actions with markets. There is a large amount of commentary due across the wires from ECB officials today and with markets on edge traders will be looking for indications or promises of sufficient stimulus. Such rhetoric will no doubt weigh on the EUR but may well provide broader global markets with the support it needs, especially as thus far ECB stimulus promises have done little to improve conditions. This morning we have seen comments from the ECB’s Coeure, so far he is towing the party line suggesting that loose monetary policy must be accompanied by reforms and talk of reforms without action is the “worst of all worlds”. On the data front 3 year LTRO repayment details and the Eurostat GDP estimate are due for release mid morning.
The pound was a notable strong performer yesterday, it has been a while since we have seen broad based GBP strength but a rise in rate forecasts helped support the pound, 2 year gilt yields rallied over 25% as GBPUSD rallied above 1.6000 once again, while also driving EURGBP back below the .8000 level. Data from the UK has provided little support but labour market data released on Wednesday confirmed unemployment dropped to 6%. There are concerns on the make up of this figure, many of the new jobs added are low wage and part time positions, distorting the figure while not adding significantly to economic growth . Comments from the BOE’s chief Economist this morning has seen GBP trading in a volatile range, he initially pointed to diverging economic forecasts and implied interest rates may be lower for longer, while also saying he expects the UK to grow above trend for the next few years. Data is light today from the UK but GBP will be looking towards next week’s GDP release.
Despite gaining against higher yielding and EM currencies, the USD has struggled this week against its G6 counterparts. Concerns on a global slowdown impacting US growth, as well as mixed data from the US itself has seen many Fed speaker pull back their rate hike talk. As mention above the Feds Bullard even went as far as to suggest a delay to the end of QE in the US, to help support markets and address falling inflation expectations. The USD still remains vulnerable to weaker data, especially as the USD is now facing its second straight week of declines following a 13 week rally, should this afternoons University of Michigan confidence survey disappoint or should Fed Chair Janet Yellen (who is due to speak to the Boston Fed) remained subdued on outlook, the USD could well enter the weekend on the backfoot.