Market News & Insights
2 February 2015

Just Have a Little Patience

EUR/USD 1.1329
GBP/USD 1.5065
GBP/EUR 1.3294 (0.7520)
EUR/CHF 1.0530
GBP/CHF 1.3999
GBP/AUD 1.9335

If we have a look back to the last trading day of the month, Friday, we saw yet another central bank cut its main interest rate, this time in the form of Russia. January saw a handful of central banks unexpectedly loosening their monetary policy measures with banks including Denmark, India and Singapore all suffering from the same faith as increasing deflationary pressures continue to take its toll. Looking at the price action in the markets, there is also a real belief that the Reserve Bank of Australia will also follow suit this week and cut its 2.5% rate by 25 basis points, and for the first time since August 2013. If this is the case, the Aussie will have joined a long list including Canada, Europe, New Zealand to name but a few who have eased their monetary policy stance in the past 6 months.

This brings us on nicely to the US and last week’s FOMC where the Fed continued its “patient” rhetoric. With many analysts still hawkish on the US increasing rates by Q3 of this year, we even had the Federal Reserve Bank of St. Louis President James Bullard say on Friday that markets weren’t wrong in expecting a Mid-Year rate rise. However one cannot overlook look the health of the global economy here, with all the aforementioned banks loosening their belts and pumping liquidity into their own domestic market. A rate hike in the US would evidently see a strong dollar and with many US multinationals already reporting weak earnings in the quarter ending December, the main factor here being down to unexpected currency movements, further measures here could spell danger.

Another major concern of course is the falling inflation figure, where December’s CPI dropped 0.4% which was its biggest monthly fall in six years. While falling oil prices should theoretically stimulate household spending, the IMF claim that the real income effect is smaller for the US compared to its peers in the eurozone and Japan, as the US now produces over half of the oil it consumes. While there is no doubting the recent strength of the US and its domestic demand coupled with falling unemployment, there is an air of caution to be had as some key data releases last month missed analysts’ expectations to the downside i.e. Advance Retail Sales, Durable Goods Orders and GDP all coming in well below expectation. Again it is a case of keeping a close eye on the economic data from here on in.

Earlier this morning we had Manufacturing PMI out for the Eurozone where it came in as expected at 51.0. The UK Manuafacturing PMI figure is also crossing the wires as I type coming in at 53.0 vs. 52.7 expected. This afternoon we have some data out of the US which will be of interest, Personal Income and Personal Spending both expected to have declined from the previous months reading. Later in the day we have more data from the US, ISM Manufacturing PMI, which is also expected to decline, but remain above the key 50.0 level which indicates industry expansion.