Market News & Insights
22 October 2014

GBP Vulnerable To Subdued BOE Minutes

EUR/USD 1.2690
GBP/USD 1.6064
GBP/EUR 1.2658 (0.7899)
EUR/CHF 1.2062
GBP/CHF 1.5270
GBP/AUD 1.8302

One thing is certain in markets these days and that is volatility has returned with a bang, it may be dictated by fear and stimulus expectations or central bank policy but +2% moves have been the norm in equity markets through the last two weeks while major currency pairs find themselves at a crossroad with plenty of potential for breakouts, this increases risks to business and efficient managing of your currency risks is key when markets are this volatile, if you wish to talk to one of our treasury and risks specialist please call our treasury desk on the number below. Global markets saw a return to positively through yesterday’s session with European equities leading the charge higher on the back of better than expected earnings and news the ECB may look to buy corporate bonds as part of their asset purchase program.

The DAX, CAC and FTSE were up 1.9%, 2.1% and 1.6% respectively while the Euro faced selling pressures, as the potential scope for ECB purchases widens. Traders in US markets have been experiencing some serious whipsaw action over the last couple of weeks, US stocks rallied higher again yesterday, led by the S&P which rallied 2%. The USD was also an out-performer on the day clawing back early losses this week against EUR, GBP and JPY amongst others.

Data was light through yesterday but the big revelation on the day, and a key driver for risk, came from an unconfirmed Reuters reports the ECB would look to the corporate bond market to fulfil its asset purchases targets. This widens the pool for potential QE and although people close to the matter have confirmed such a topic is not up for discussion in December’s ECB meeting, it is something that has been mentioned before. The EUR traded lower on the news but again the reaction in the single currency in telling. EURUSD has dropped just over 1% in the last 24 hours but still trades well above the lows around 1.2500, at this stage markets want to see confirmation of potential policy in action before a larger rout begins again in EUR.

The greater potential for QE however does leave the single currency open to weaker data once again, which it has been somewhat ignoring over the last three weeks. Data remains light from the Eurozone once again today, ECB member Linde speaks in Madrid this afternoon and markets will be looking for any indication or comments on QE. It was reported the ECB was in the market buying Italian covered bonds yesterday, further confirmation of ECB purchases carry the ability to weaken the EUR but as size, scope and duration of the ECB’s policy remain unknown , EUR positioning is likely to remain cautious, albeit to the downside.

We have been somewhat void of major data this week but the economic calendar returns today with some interesting releases, bound to add to the volatility we are already experiencing. We discussed the BOE minutes yesterday, they are due for release this morning and current GBP positioning would suggest markets are preparing for a subdued release, GBP has traded lower against the EUR and USD already this morning, EURGBP pushed back above .7900 while GBPUSD dropped below 1.6100 on sterling weakness. The actual BOE release was two weeks ago and with no change in policy was a dull affair, the minutes however give us the opportunity to analyse the tone of the meeting and to see what way MPC members are leaning in relation to policy outlook, more specifically rate increases.

Our concern for GBP is that last week’s inflation print was below expectations, combined with several warning on global growth (IMF, Fed etc) could well lead MPC members to be more subdued on recovery. Previous meeting have seen votes of 7-2 in favour of maintaining rates, with inflation now at 1.2% we feel it is unlikely any further MPC members would have looked towards a rate hike. Meaning potential downside for GBP as rate hike forecasts get pushed further back into 2015. There are also a couple of BOE speakers on the wires across the day, again any mention of policy outlook will be closely watched and our focus will be on Gilts and GBP swaps for any signs of weakness in the pound.

The USD found support in the rally in risk appetite yesterday, we had mentioned the dollar had only found minor support from its safe haven demand status and the rally in risk appeared to put the USD back in demand once again. This is less likely related to the actual currency but more to do with the underlying themes in the market, the S&P’s 2% rally was the biggest in 12 months yet the actual swell in risk appetite didn’t move across into currencies. We are sure to have more currency related moves today however as US CPI inflation readings take the spotlight in the afternoon session. Year on year inflation is expected to drop to 1.6%, the lowest level since March, versus the Fed target of 2%. Should we be surprised to the upside on this print we are likely to see a rally in US rate expectations and the USD as well. Anything that may suggest the Fed will hike rates sooner should send the USD rallying. Global inflation has been a sticky point however and the general tone in developed markets is inflation is trending below target.