GBP/EUR 1.2677 (0.7888)
The FOMC minutes were the key event in trading yesterday and markets were relatively quiet ahead of the release. The minutes failed to meet the hawkish expectations from Septembers FOMC meeting and equity markets rallied on the prospect of lower rates for longer. As we had warned the build-up of positivity on the US economy had seen the USD rally consistently through Q3, the slightly more cautious tone from the FOMC saw many traders take profits in the recent USD rally, while many of our clients took opportunities to sell USD ahead of the meeting, resulting in broad based USD selling across the board, while US equity markets rallied from recent 8 week lows. In the Fed’s minutes the FOMC offered a more conservative view of the economic and financial outlook, including risk to the US relating to the global slowdown in economic activity.
Our take away from the minutes suggests the FOMC remain cautious on their exit from loose monetary policy especially with more prevalent global risks, the rally in equities and the USD sell off suggest a pickup in risk appetite on the premise of lower interest rates, driving investors to look for returns. This will remain data dependent however, and while there are certainly signs of growth in certain areas in the US economy, the pace of expansion remains mixed. There are several Fed speakers on show throughout the afternoon and evening, most speaking on the economy/global economy and policy. No doubt questions will be asked about yesterday evenings minutes and the USD will remain vulnerable to comments across the wires through the afternoon session.
GBP lost ground in trading through much of yesterday, EURGBP has rallied close to .75% from yesterday’s lows, while only heavy USD selling late in the day saved face against the USD. Looking at the rates markets there appears to be a shift lower in rate expectations through yesterday’s session with 12 month swap rates falling 36 basis points, pricing in only one rate hike for the next 12 months. The BOE headline today’s data calendar with their rate decisions and asset purchase announcement. There is no change expected from the current .5% rate and 375bln in asset purchases, and as is the status quo, we expected no statement following the release.
Data from the UK has tended to be below expectations and as we highlighted the second half of the year is likely to see a slowdown in growth, this has already resulted in GBP losing much of its shine. The slowdown is likely to make it more difficult for MPC hawks to gain the majority 5 votes to raise rates, last month’s vote was 7-2, and dampening data and falling house prices are unlikely to help the hawks corner. For now however GBPUSD continues to rally, we are likely to find USD buyers again as we reach above 1.6300 but for now that just remains a target.
The story for the EUR continues, Draghi failed to meet market expectations on the ECB QE program and the single currency has rallied every day this week. The heavy positioning in short EUR was always going to be vulnerable to a disappointment from the ECB and while the longer term trend for the single currency remains lower, the shorter term is seeing some correction to the larger trend. Draghi will be speaking in Washington later today so we may well see some further clarity. Again the market is looking for a commitment to size, and suggestion on this front may well see the single currency’s rally short lived.