Market News & Insights
9 December 2014

The Dollar’s Not Fed Up Yet

EUR/USD 1.2353
GBP/USD 1.5664
GBP/EUR 1.2680 (0.7886)
EUR/CHF 1.2022
GBP/CHF 1.5245
GBP/AUD 1.8910

Yesterday was a relatively quiet day on the economic calendar front in terms of major releases. However in the US we saw the Federal Bank of Chicago publish a survey predicting US economic growth to pick up in 2015, with the unemployment rate continuing to fall, while inflation is expected the slow slightly. These results will only bolster the view that many analysts have regarding when the Fed will raise rates, with many now pricing in a mid 2015 deadline.

The dollar continues to look to be the go to currency as it remains strong and trading positively against all its major currencies. While there is no doubting the data from the greenback has called for optimism, last Friday’s Non Farms highlighting this fact, there is a case for analyst to an air on the side of caution. If you recall in yesterday’s commentary, it wasn’t too long ago that the euro and pound were trading significantly higher against the dollar. Yesterday however we have saw GBP/USD touch its lowest level since August 2013, while we have seen EUR/USD come off March 2009 lows. The question will now be how the dollar deals with these levels, as the higher value currency will start to weighs on trade, tourism, etc.
The Fed have also continued with their “considerable time” rhetoric, and we may well see this tone repeated at next week’s meeting. We heard from Fed Vice Chairman Stanley Fischer last week reaffirming that the Fed were in no rush to drop the phase as inflation rate remains persistently below the Fed’s 2 percent goal. Thursday’s Advance Retail Sales and Friday’s University of Michigan survey will provide some key understandings regarding the latest US outlook.

Another economy that has been suffering from inflation, albeit a much more severe case is the Eurozone. Yesterday the ECB announced the volume of last week’s cover bond and ABS purchases. The figure fell to 233 million euros in the week ending Dec 5th, a disappointing result when you compare it to the first weeks reading of 369 million euro. This reading underlines the challenge for the ECB to expand its balance sheet and if this figure continues to fall it will add pressure on the ECB to introduce broad-based asset purchases, including government bonds at its Jan 22nd meeting. However the ECB appear apprehensive to pursue this route, as there are substantial hurdles that will need to be overcome.

This morning we had some early data from Germany which saw its trade balance improve and beat analysts’ expectations coming in at 20.6B vs 18.1B expected. German exports have increased by 4.9% and while imports by 0.9% from October 2013 to October 2014. The single currency will have to wait till Thursday before we have any other releases of note, with the ECB Monthly report being the highlight.

The UK also has some data due out this morning with Industrial and Manufacturing Production due at 9:30am. On a monthly basis, manufacturing output is estimated to have fallen to growth of 0.2% in October from 0.4%, while industrial production is also expected to fall to 0.3% growth from Octobers 0.6%. Production is expected to have decelerated as geopolitical uncertainties and economic headwinds both at home and abroad have weighed on the UK’s recovery. If we see any better than expected results here we could see some upside for the pound this morning.