GBP/EUR 1.2036 (0.8308)
All eyes today will be on central bank action as the BOE and ECB take centre stage. There is little change expected from the BOE, and regular readers will know that means we are unlikely to see any comment from MPC members, instead we will have to wait for the minutes to be released in two weeks. The Autumn Statement due from Chancellor Osbourne will likely carry greater implications for GBP.
The ECB is another story, and although we do not expect any changes from the central bank, the press conference will be closely watched for any indication of further easing or non-standard measures. Disinflationary pressure have marginally subsided over the last month and the impact of last month’s rate cut has yet to filter through the markets. In reality there has been plenty of scepticism surrounding the impact of a rate cut from such low levels already and it is felt the ECB will have to act further in 2014.
Negative interest rates have been the hottest topic but in reality this may put further pressure on bank’s capital requirements ahead of key stress tests. Draghi has said this is an option but we feel it may be too early for such action. More traditional QE style easing is more likely, another LTRO or large scale asset purchase program has been discussed in the past and these topics will be key during the press conference. We expect EUR volatility surrounding this and see risks to the downside for the single currency.
Despite signs of improvement in the UK economy and a very strong pound, we see reversal risks as a real danger for GBP. There has been a lot of positive data priced into the pound and whilst many assume the BOE will maintain their status quo (until the hike rates later in 2015 according to forward guidance), a surprise from the central bank could see heavy selling in GBP. Today’s Autumn statement should give some colour on conditions in the UK and plans going forward.
Recent data from the US continues to see taper expectation shift. Strong ADP employment figures yesterday saw the USD rally as markets expect the strong jobs figures to run through to tomorrow’s NFPs. In reality ADP and NFP’s have very little correlation, but the 215k jobs added to the economy in Nov, vs the 170k expected points to a stronger jobs recovery than initially priced. Home sales data was also stronger than expected for October however the ISM non manufacturing reading was worse than expected. GDP, consumption data and factory orders will all help build a case for taper expectations with third quarter GDP expected to tick up to 3% from 2.8% annualised.