GBP/EUR 1.2219 (0.8183)
Last week’s dominant themes persisted overnight as the USD slump continues. The greenback is poised to make its 11th consecutive daily decline as US data remains mediocre and global risk sentiment and rallying equities see USD under persistence selling pressures. GBP continued its run of strength as GBPUSD broke to the highest levels since November 2009 following news that UK house prices rose at the fastest level since October 2012. BOE governor Mark Carney is risking sounding like a broken record as he commented that forces holding down UK interest rates would remain persistent, his comments apparently falling on deaf ears as the pound has shown little sign of low interest rate concern.
A US holiday today and an economic release calendar void of any major releases will likely see these dominant themes persist. Looking forward this week however there is plenty of event risk ahead so we can take a look at some of the major points that will be impacting currencies. In the US we will be looking at the FOMC minutes (Wed) and Consumer Price Index inflation data (Thurs) for further USD signals and it has to be said there are further downside risks ahead for the USD.
Thus far we have seen $20bln taken off the Fed QE program and despite expectations for this pace of tapering to continue it is difficult to avoid the weaker than expected data coming from the US. Two weak jobs reports will be difficult to ignore and any reference to this in the minutes or any sign of concerns from the FOMC is likely to put the USD back on the chopping block. Inflation in the US is expected to remain relatively lacklustre through January and the Fed have been consistent in their view, inflation is to remain somewhat subdued through 2014. Only a sizeable surprise to the upside will lift USD.
The Euro has held up well and despite some shakes early last week when negative deposit rates were discussed the weak USD and improved global risk appetite has helped the single currency gradually advance. There has been some notable dovish commentary from France in recent weeks, despite an improving GDP release exports remain subdued, a weaker currency would certainly help several ECB member states. The ECB however has been happy to remain on hold the last couple of months despite obvious disinflationary pressures and this has allowed EURUSD to remain elevated above 1.3600. Looking forward, Tuesday’s ZEW confidence data and Manufacturing and Services PMI data due for release on Thursday will take centre stage on the release front from Europe.
As mentioned Mark Carney has been vocal again in trying to reassure markets that rates will not be rising until the spare capacity in UK markets is filled. Part of the BOE’s new forward guidance will look at inflation expectations. Currently core inflation remains below the BOE’s target of 2% and further data due to be released tomorrow may help Carney should core CPI remain below 2%. Unemployment data is due out on Thursday and is expected to fall to the BOE’s initially guided level of 7%.