Market News & Insights
13 January 2015

Pen, Pad or Tip-ex?

EUR/USD 1.1807
GBP/USD 1.5103
GBP/EUR 1.2788 (0.7817)
EUR/CHF 1.2008
GBP/CHF 1.5343
GBP/AUD 1.8518

It has been a mixed performance for the USD in the opening trading hours of the week. The greenback finished last week on the back foot following weak wage growth data and the opening trading day did little to see much improvement from the USD as it remained choppy. Economic data was light but the dollar was pulled by other markets factors. The decline in crude oil to below $45 per barrel put stocks on the back foot, led lower by energy stocks, this allowed the USD some favour as safe haven demand saw some USD buying, especially as the JPY, the next “go to” risk aversion currency fell somewhat out of favour as Japanese PM Abe is expected to take steps to weaken the currency further.

The Feds Lockhart was also speaking yesterday, his views are relatively consistent with the data we have been seeing and all in all he was towing the party line. Lockhart suggested the economy is “hitting on all cylinders” and expects reasonably strong growth through 2015 with unemployment continuing to fall. Even if inflation remains below the Fed 2% target Lockhart suggested the Fed may still move to raise rates, but not until the second half of the year. Once again the US calendar is quiet today so risk appetite will have it’s part to play in USD direction. While minor data readings in the form of NFIB Small Business Index and Jolts Job Openings out this afternoon, followed by the Fed’s Kocherlakota speaking on the economic outlook later tonight. The NFIB Index is expected to see a strong reading of 98.6, a level not seen early 2007. This climb would also be just below the historical average prior to the Great Recession.

Today the UK takes centre stage, as we have the all-important Consumer Inflation report out this morning. Analysts here are expecting the figure to fall further below the Bank of England’s 2% target, with the December’s YoY reading expected in at 0.7% and below the 1% mark for the first time since June 2002. Only 6 months ago with the inflation reading at 1.9%, the BoE Governor Mark Carney appeared to be prepping the market for a rate hike stating in July that it “could happen sooner than markets currently expect”, now however many analyst aren’t calling for a hike till 2016! While the UK data itself has come off the boil somewhat, much of the underlying factors for this are from the slowdown in the Eurozone, while the fall in food and in oil prices have also weighed on inflation.

Today’s expected inflation reading of 0.7% would mark a somewhat historic event as a drop below the 1% mark would see Carney writing an open letter to Chancellor George Osborne explaining why prices have declined. The letter itself however will need to contain more than the word oil as the Governor will also have to explain the period within which the bank expects inflation to return to within target and what action will be taken by the MPC to achieve this. Many analyst now expect inflation to remain below target until next year, which will also prompt many to push back their rate hike forecasts. It will be interesting however to see Carney’s outlook on this, however the contents of the letter will not be published till Feb.18th. It is important to remember that the UK is not the only region where inflation has caused concern. Only last week we saw German inflation reading at 0.2% while the Eurozone figure fell into deflation territory at -0.2%. Later this week we will also see how the US get on, with their reading expected to be 0.7% also.

It is also a quiet day on the data front from the Eurozone with much of the attention now on the ECB’s President Mario Draghi and the legal read out due tomorrow. Here we are expected to see whether the ECB’s Outright Monetary Transactions program has overstepped the law which would potentially mean that they may have to rein in their QE program.