Foreign Exchange News
28 October 2014

Tension Builds Ahead of FOMC Announcement

EUR/USD 1.2691
GBP/USD 1.6099
GBP/EUR 1.2678 (0.7888)
EUR/CHF 1.2063
GBP/CHF 1.5291
GBP/AUD 1.8244

The tone through much of yesterday’s session remained subdued. Despite most banks in Europe passing the ECB’s recent stress tests European markets we pulled lower, particularly by the slide in Italian lenders. Italian banks fared the worst and Italy’s oldest lender Monte Paschi declined some 22% following the stress test results. Overall we still see the capital adequacy review as having a positive impact, obviously there are concerns about those that failed, however they have ample time to come up to scratch (as mentioned yesterday the data is from December 2013 and as much as half have already met requirements according to the ECB) and those that met the requirements will now (hopefully) be free to start lending. Equities in the US followed Europe lower, following some weaker than expected data, there is a certain amount of tension in markets ahead of the FOMC’s two day meeting which begins today, the USD has been feeling the pressure as well and has been on the slide for two days now, and is facing its first monthly decline since June. Markets remained subdued overnight with the USD remaining under pressure, JPY advanced as did the AUD

Data from the UK is on the light side this week, however there are a number of BOE speakers due across the wires. Deputy Governor Shafik made comments in a Financial Times interview playing down inflation pressures but maintaining a high bar for rate hikes. Last week saw the initial release of Q3 GDP and as expected the pace of growth in the UK slowed moderately. This is as expected and indeed the BOE have said that the pace of growth would slow through the second half of the year so a slightly lower GDP is not a surprise. That being said year on year growth remains at 3%, down from 3.2% while the economy grew .7% through Q3 alone, in line with the monthly NIESR GDP estimate which has growth averaging at .7% also. Growth at these levels puts the UK well ahead of many of its European neighbours and bettered only slightly by the US and well above post crisis averages. The good news for the UK is recovery does appear balanced though key sectors with construction, services and industry growing .7%, .7% and .5% respectively.

The moderate slowdown in the pace of growth through Q3 is unlikely to impact the BOE’s policy outlook, this is only the initial estimate and there will be two further revisions with scope to go higher and hit the BOE estimate of .9%. There will likely be rising concerns however, that weakness in the Eurozone may now start to factor into BOE thinking, especially if it results in a continued lag on growth across the UK, there are also larger global concerns impacting growth expectations with China growing at its slowest pace in 5 years while Russia is also suffering from restrictions.

Despite the 6th consecutive month of declining IFO data from Germany and confirmation the ECB purchased some €1.7bln in covered bonds the single currency remain buoyant through yesterday’s session. The Euro was initially under pressure from GBP which broke through last week’s lows at .7871, trading as low as .7862 before rallying back higher this morning. The EUR also advanced against the USD, again it was initially lower but weaker US data and FOMC concerns saw accelerated USD selling which helped EURUSD close the day marginally higher. The ECB are expected to continue their asset purchases and will now report on their weekly activity each Monday. We have seen the single currency trade slightly firmer again this morning following stronger than expected German import price but EUR upside remains limited, especially with the ECB continuing their asset purchases. There is no other major releases to get attention today so we will be keeping an eye out for signs the ECB are in the market again.

The USD has started the week under some pressure. The FOMC begin their two day meeting today and markets expect them to announce an end to their QE program while also suggesting rate will remain at record lows for a considerable time. This removal of stimulus from US markets has seen equities impacted but the reversal of rate hike expectations has seen the greenback impacted and heading towards its first monthly decline in four months. Given the large potential impact on USD expectations from Wednesday’s announcement USD positioning is difficult to gauge and we are likely to see dollar pairs trade in a relatively narrow range. Data for the US has tended to be to the low side of expectations the last couple of weeks, yesterday’s release of PMI services data posted 57.3 vs 57.8 expected, while home pending home sales only rose .3% vs an expected 1%. The Dallas Fed manufacturing index also printed below expectations at 10.5 vs 11, following the trend of last week’s weaker manufacturing PMI release. Durable goods orders and consumer confidence headline today’s releases, both are expected to have improved (durable goods up from a record low print in August), but may only set the tone into tomorrow’s FOMC.

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