Market News & Insights
19 February 2015

GBP Rallies As Wage Growth Diverges from Falling Inflation

EUR/USD 1.1435
GBP/USD 1.5458
GBP/EUR 1.3515 (0.7398)
EUR/CHF 1.0744
GBP/CHF 1.4513
GBP/AUD 1.9882

Risk sentiment continues to try and find its feet. Greek debt negotiations appear to be going around in circles, despite headlines suggesting Greek leaders will be applying for a six month extension, the terms are yet to be confirmed and without the finer details it is once again hope that is lifting markets. European stocks traded higher on the news Greece would be applying for an extension. Another boost to risk appetite was news the ECB has extended the limit on ELA funding, up €3.3 bln to €68.3 bln. According the Barlcays this should give Greece access to emergency liquidity funding for an additional week (they are targeting a march 5th deadline). Elsewhere last night’s FOMC minutes struck a notably dovish tone, despite the prospect of interest rates remaining lower for longer US stocks struggled to maintain meaningful gains and closed the day rather mixed. The USD faced selling pressures on the back on the minutes, losing ground against the EUR and JPY, while it added to losses against GBP. Overall the USD index was down over .3%.

Whipsaw action continues in EUR pairs and once again Greek debt negotiations will be taking centre stage, we’ve discussed this enough over the last few weeks and while Greece appear to be willing to make some concessions on their stance, even applying for an extension is them making steps towards mediation, however if they still refuse to accept additional conditions, or have their own stipulations for agreement, we may well face further deadlock. Outside the Greek drama, focus in Europe today will be on the first release of the minutes from the ECB’s January policy meeting. The ECB have taken the step to release minutes, similar to the Fed and BOE, in order to highlight policy discussions. The fact it is the first time we will see this release from the ECB means it’s a little difficult to forecast its format, or what exactly will be revealed, but given the January meeting provided the introduction of the ECB’s full blown QE program, with €60bln allotted in asset purchases per month, any indication on concerns of size, or potential expansion will likely put the EUR under some pressure.

Labour market data headlined releases from the UK yesterday, we discussed the improving labour market conditions in yesterday’s report and we were surprised by lower than expected unemployment, dropping to 5.7% from 5.8%. The big upward surprise came in wage growth, up 2.1% versus 1.7%, with falling inflation in the UK diverging from rising wages the prospect of earlier than expected rate hikes becomes a little more real. EURGBP once again was forced to fresh lows, trading as low as .7350, while GBPUSD continued its bull run, firmly establishing itself above 1.5400.

Yesterday we mentioned the USD’s bull run, while not over, was beginning to come under pressure as USD demand has subsided. We also warned that the Fed were likely to be more cautious on rate hikes, if they posed a significant risk to growth, especially given the weak growth environment outside of the US. Last nights Fed minutes confirmed this with the minutes somewhat more dovish than many market participants expected but in line with our view the Fed will be taking a far more cautious approach to rate hikes than market expectations. The FOMC minutes outlined concerns about downside risks to inflation, with “many participants” inclined to keep rates at record lows “for a longer time”. Overall US data has tended to be on the low side of expectations, especially from December on (with the exception of NFP’s), yesterday was no different with building permits, housing starts, industrial production, manufacturing production and PPI data all below expectations. The USD index sits on key support at the moment, should we see data continue to the downside we are likely to see USD break.