GBP/EUR 1.3047 (0.7664)
Last week certainly provided us with some major fireworks across markets and we are unlikely to have seen the end of volatility, especially in currency markets, as we await the ECB’s Jan 22nd meeting, where markets are now expecting the ECB to announce the details of their QE program to tackle low growth and falling inflation in the Eurozone. The EUR fell to 11 year lows against the USD following accelerated selling last week, after the only consistent buyer of the single currency, the Swiss National Bank (SNB), removed the floor target for their EUR/CHF exchange rate. Friday saw the decline of Swiss stocks continue as the costs of a surging currency impacts the outlook for Swiss firms. Oil rebounded late last week helping to lift US shares for the first time in 6 days, the S&P was up over 1.3% on Friday led higher by energy companies, although US markets will be closed today for Martin Luther King Day. The EUR has steadied itself somewhat, pulling back higher from Friday low close but that is likely to be just some profit taking ahead of major volatility risk.
The ECB is not the only party in town this week and as the fallout from the SNB’s decision still resonates across markets other nations with pegs against the EUR are starting to get some attention. We also have Greek elections due at the end of this week, the 25th of Jan will be D-day for Greece, the far left Syriza party are leading the polls and what this will mean for Greece’s Austerity programs is causing some ripples of concerns across the region. Thursday sees the ECB take centre stage in Europe and markets are expecting them to announce a QE program, €500bln would be at the low end of expectations with a program of €750bln probably enough to appease markets. The purchase of Eligible Government Bonds (EGB’s) is expected to continue as long as Eurozone inflation remains unacceptably below ECB targets.
GBP has been benefiting from its weak neighbour in the EUR, but against the rampaging USD it continues to struggle to advance above 1.5250. While UK data is quiet today, the BOE minutes are due on Wednesday and may continue to see GBP pairs subdued. Interest rate hike expectations continue to hold down GBP, certainly versus the USD where despite both economies outperforming their peers, and with similar inflation readings, the US is well ahead of the UK on the rate hike curve. With the recent drop in UK inflation to .5%, if we saw MPC members shift their voting to a more dovish stance then we may have additional GBP weakness. The risk is the two members, who have been voting for rate hikes, change their votes to keep rates on hold, this will be viewed as a dovish stance from MPC members and encourage GBP selling.
As discussed it’s a US bank holiday today and as such we will be trading in somewhat quieter conditions today, Eurozone data due for release is unlikely to have an impact on the bigger picture of the ECB this week and as such any EUR moves on the back of this week’s data will likely be limited. The single currency has started the day firmer, although we are still a long way from recovering even Thursday’s Euro selling levels.