Market News & Insights
3 November 2014

Fireworks Look Set to Continue this Week

EUR/USD 1.2481
GBP/USD 1.5981
GBP/EUR 1.2802 (0.7811)
EUR/CHF 1.2055
GBP/CHF 1.5426
GBP/AUD 1.8281

We’ll start the commentary off in Asia today where on Friday we saw the yen plunge to a near seven-year low against the greenback. This was as a result of the Bank of Japan shocking the financial markets with an aggressive easing of its monetary policy. Japan’s economy, has been hit by four recessions since 2000, and has struggled with deflationary issues since the mid-1990s. Some of the root factors behind Japan’s lethargic recovery include the collapse of asset bubbles and a banking crisis, issues which have also plagued the Eurozone. The situation in the Eurozone is not yet as severe as in Japan, but some of the same deflationary symptoms do exist.

Japan’s monetary policies are moving in the opposite direction to the US, and with the hawkish tone adapted from Fed last week we saw the dollar appreciate against all but one of its 16 major counterparts. The Fed’s optimistic comments around the economy and bringing its bond-buying program to a halt raised expectations that the U.S. central bank will increase interest rates sooner than previously forecast. This saw the euro fall to a two and a half year low against the greenback, while cable dropped to yearly lows.

The market has placed the US in pole position to raise their interest rate ahead of the UK. The Fed highlighted “solid” job gains and a falling unemployment rate in its statement while maintaining the “considerable time” rhetoric. This means that markets will have to turn their attention back to economic fundamentals and with Non Farm Payrolls this Friday, there is a real chance for the greenback to get the wind behind its sails.

Back to today and we have US ISM data due out, where a downshift in manufacturing’s pace is expected. The growth overall however is anticipated to remain healthy, with the initial reading for October 56.2, well above the neutral 50.0 mark. Considering the generally strong trend throughout the US economy lately, it’s unlikely that we’ll see anything beyond a mild dip in today’s survey numbers.

It hasn’t been all doom and gloom for the Eurozone, as Friday’s Consumer Price Index reading showed inflation edging up slightly and this has helped markets reinforce the view that the ECB will hold off on any additional policy action at next month’s meeting. The reading showed consumer prices rose by 0.4% in October, in line with market expectations, and a reading which carried slightly more significances when you consider a day earlier German inflation slumped to its lowest reading since May. There was also good news on the unemployment front where the reading remained unchanged at 11.5% in September.

The single currency has a relatively quiet week ahead, with Thursday’s ECB meeting and monetary policy announcement being the exception, however no policy changes are expected here. Market analysts will be all ears on the scheduled press conference to gauge whether any further steps will be taken to boost the Eurozone economy.
In the UK, today kicks off a run of three days, where we see a major PMI release on each day. We start today with PMI Manufacturing, where the figure is expected to dip to 51.4, its slowest rate of growth in 17 months and edging closer to that 50 mark where any reading below indicates contraction. The UK’s recovery has certainly slowed in recent months as it feels the pinch from Europe’s ongoing troubles. The next three days of PMI reports will certainly offer us a timely update on whether there is still a generally upbeat outlook in the UK, and any major misses here could see cable back on the defence.