Market News & Insights
20 October 2014

Risk Appetite Rebounds While Risks Remain

EUR/USD 1.2770
GBP/USD 1.6117
GBP/EUR 1.2619 (0.7924)
EUR/CHF 1.2060
GBP/CHF 1.5233
GBP/AUD 1.8385

Friday may have seen more settled markets versus the majority of last week but the warnings have been made clear, there are still risks to the global economy and inflation and growth concerns carry significant ability to impact central bank policy across the globe. This month we have already received official downgrades to global growth from the IMF, central banks are now also towing the line with FOMC and BOE members also voicing concerns on growth and suggesting loose central bank policy will remain in place to accommodate as necessary. Several Fed speakers last week voiced this view, with the usually hawkish Bullard suggesting the FOMC should continue with asset purchases, while the BOE’s chief economist also fired shots across the bow implying interest rates could remain lower for longer should global growth continue to be impacted. Both the above statements carry significant implication on their respective currency outlooks, while we continue to look towards the ECB to provide an indication on the scale of any potential QE program. Volatility in global currencies has added to potential risks for our clients and we continue to work alongside them to effectively hedge these risks.

In equity markets stocks in Europe had their biggest one day advance in three years as expectations grow that the ECB will be forced to provide additional stimulus measures. The CAC, DAX and FTSE were up 2.9%, 3.1% and 1.9% respectively on Friday while even Greek markets experienced a 7% rebound following a week of record selling on concerns surrounding the financial future, equity markets still finished down over 7% despite Fridays rebound. The positive tone continued through the US session late on Friday with stocks closing in the green following better than expected consumer confidence data, while in overnight trading the positive tone continued as the Nikkei rallied following reports the nations $1.3 trillion pension funds will boost stock holdings. In currency markets trading for the majors was mixed, JPY and USD enjoyed safe haven demand through much of last week yet failed to finish the week higher as expectations for Fed rate hikes gets pushed further back. GBP has been trading in its low range against the USD, while the EUR traded the week slightly firmer in general, bad news managing to have relatively little impact on the single currency.

The boost in risk appetite through Friday and in the early part of today’s session has seen increased demand for higher yielding, positive sentiment linked currencies like the NZD and AUD rallying overnight. The above mentioned rally in the Nikkei led to declines in the JPY which bounced off lows just above the 105.00 level versus the USD. The USD itself is facing some early selling this morning with GBPUSD testing last week’s highs as EURUSD also looks to push higher. Looking ahead to today’s calendar and the economic docket has little to attract major volatility. Instead focus will likely be on Q3 earnings releases to drive market appetite.

Looking ahead to major releases this week and it will be a big week for GBP. The pound has managed to trade back above lows against USD below 1.6000, now currently back above 1.6100 and looking to push higher, while EURGBP has rejected above .8000 and moved lower looking to test towards .7900. The minutes from the BOE’s last meeting are due for release on Wednesday with retails sales for the UK due out on Thursday while the Q3 GDP figure is due for release on Friday. GDP is expected to have slowed moderately although year on year growth of 3% is still expected, a solid figure versus some of the UK’ s major trading counterparts. In the Eurozone focus will likely be on PMI reading due on Thursday, while there are also a number of ECB speakers scheduled throughout the week, focus here will be on any comments relating to the ECB’s QE promise.