Market News & Insights
18 December 2013

Tentative Markets Await FOMC

EUR/USD 1.3769
GBP/USD 1.6295
GBP/EUR 1.1835 (0.8450)
EUR/CHF 1.2203
GBP/CHF 1.4443
GBP/AUD 1.8290

Not much went on in the markets yesterday with thin trading in pre Christmas markets impacted even further by uncertainty surrounding today’s FOMC announcement, due this evening at 7.00pm. European and US equities were marginally lower and the overnight Asian markets were mixed with Japanese indices boosted by a weaker yen and good trade data, the USD has been stronger over night against EM currencies and the USD pulled some ground back against the JPY also.

The pound was an under performer losing ground against the EUR and USD, breaking to fresh three month lows against the greenback following weaker than expected inflation figures easing pressure. Based on recent PMI growth, especially in the services sector we felt there was potential for a stronger inflation reading, however the drop to 2.1% from 2.2% has eased interest rate pressures on the pound and we may well see the pound move lower should inflation fall in line with the BOE’s guidance.

The EUR was also lifted by strong ZEW confidence data helping lift EURGBP to a 1 month high but overall ranges remained tight and EURGBP has significant resistance above .8465. Merkel has been on the wires this morning following overnight news that finance ministers have come to an agreement on closing bad banks within the banking union, details of which are expected to be hammered out today. Comments from Merkel this morning saw minor EUR selling but little follow through, comments like “no single solution to the debt crisis, SRM for banks is needed, investors need to pay into a resolution fund” would not be EUR supportive but in the grander scheme the EUR remains resilient.

Obviously the major event of the day remains tonight’s FOMC but in this morning session we have the BOE minutes and UK employment data and at 9.00am and more German confidence data in the form of the IFO. The consensus is for the German IFO to improve to 109.5 and may give the single currency a small lift, a better than expected result would not be a shock given the consistently stronger than expected German data, including yesterday’s ZEW.

Employment data from the UK and the BOE minutes are due at 9.30. Mark Carney was speaking yesterday and highlighted that the UK economy has further to go, despite recent developments the UK was starting from a low base and imbalances in the economy remain. The unemployment rate is expected to remain at 7.6% with a small decline expected in the claimant count rate to 3.8% from 3.9%. All in all a release as expected should be GBP neutral given the larger event risk on the day.

At 7.00pm all eyes will be to the Fed and their policy release and economic predictions. The time of year and the gravity of this release for the US and Global economy give this the potential to be one of the biggest events of 2014, the USD remains poised and we have highlighted our possible scenarios over the last few days. In short we do not believe the Fed will begin to taper until 2014 which should be USD neutral. Any reduction in QE announced will see USD rally firmly into the year end and we will be keeping an eye for one curve ball in the form of a reduction in the unemployment target, which would put the USD under some further selling pressure.