GBP/EUR 1.2526 (0.7981)
Stocks in Europe rallied by the most in a week following comments from the ECB’s Mario Draghi that Government bonds may be next on their shopping list as they try to tackle the disinflationary environment in the Eurozone. What exactly the ECB will/can do still has yet to be confirmed but anticipation is growing that the ECB will look to provide some clarity to markets over the coming months, comments from ECB members over the last week would suggest that the ECB has looked at many options, and while this all just remains speculation for now, confirmation of the size and scope of ECB easing will likely continue to see downside pressure on the EUR, not surprisingly the EUR traded lower after Mario Draghi’s comments. In the US stocks were once again little changed as they hover around all-time highs, the S&P advanced .1% on the day while the USD traded firmer on the day, the traditional avenues of USD strength were absent in yesterday’s session but the prospect of easing and lax monetary policy from its major competitors helped the USD advance through the session. In overnight markets the JPY was once again under pressure, stocks in Japan rallied as it is now expected the Prime Minister Abe will delay a second increase in sales tax (which investors see as positive for markets), call for further stimulus and call for an early election, following details Japan has fallen into recession.
While major data was light through the European session there was some high profile speakers from the ECB crossing the wires and as mentioned above comments from the ECB president caught plenty of interest. The ECB have always stood behind the euro, promises to “do whatever is necessary” helped the single currency rebound when all looked bleak, “whatever is necessary” these days has resulted in the EUR weakening considerably, we are down over 11.5% from the May highs, the ECB have been very vocal and they have taken action on some fronts, a new TLTRO program, cutting interest rates to record lows, including a negative deposit rate with the ECB all played their parts in driving EUR values lower, as of yet however markets have not been privy to exactly what type of asset purchase program the ECB are expected to announce.
The ECB have been active in the covered bond markets over the last three weeks, although their participation has been somewhat underwhelming and should they look to match programs by the Fed and BOJ they need further scope on potential assets. This will be key to Euro values going forward but should the ECB announce a larger program and full blown quantitative easing, we would expected EURUSD to drop back towards 1.2000. There are several further speakers from the ECB across the wires today, and the German ZEW economic sentiment survey also crosses the wires and should its downtrend continue it will likely put further downside pressure on the euro.
Interest rate expectations in the UK continue to fall, it’s hard to believe now that mid-summer there were calls for UK rate hikes before year end, inflation, or lack of, has caused real concerns for the BOE which was highlighted in last week’s report and this was echoed by comments from several BOE members yesterday. Governor Mark Carney pointed to “huge deflationary forces” from its trade partners while other members continued with dovish rhetoric. Taking a look at market interest rates would suggest a hike is now not priced in until year end 2015 and this may drop further should inflation data due today disappoint further. Core CPI is expected to rise to 1.6% year on year with the headline figure expected at 1.2% YoY despite only rising .1% through October. This puts inflation at a five year low and despite expecting to remain unchanged it is difficult not to see risks to the downside, especially after last week’s BOE inflation report as well as obvious slowdowns in PMI readings. Anything weaker will put the pound under further selling pressures.
The USD was firmer on the day yesterday despite some weaker data and unchanged equities. The USD is currently the best of the rest and now stands alone with its central bank now looking like the leader in the race to tighten monetary policy. Yesterday’s weaker than expected Industrial production figure and empire manufacturing survey did little to knock the greenback. PPI data crosses the wires from the US today with wholesale inflation expected to slow to an eight month low, this follows larger global trends although the Fed appear unconcerned on inflation for now, should PPI be weaker than expected the USD may give back some gains as once again inflation concerns impact rate hike expectations for another central bank. Tomorrows FOMC minutes may provide some further colour on what exactly the Feds stance is on the current below target inflation levels.