Market News & Insights
4 July 2013

Europe Wobbles as the UK Welcomes Carney to the BOE

EUR/USD 1.2992
GBP/USD 1.5251
GBP/EUR 1.1736 (0.8520)
EUR/CHF 1.2330
GBP/CHF 1.4472
GBP/AUD 1.6747

European equities have started the day slightly higher after a mixed Asian session overnight. The evening session will be relatively quiet as today is July 4th and the US celebrates its independence day but that does not mean we expect a quiet session in Europe however as two of the major events of the week take place on the European calendar with both the BOE and ECB due to announce their respective interest rate decisions. We also have continued political turmoil in Portugal not to mention the military coup in Egypt.

The pound was firmer yesterday after data from the UK continues to indicate the UK is on the right road to recovery. Services PMI data for June posted 56.9 versus 54.5 expected. This boost to the service industry, accounting for over 70% or the employed UK population, far exceeded to 50 contraction/expansion benchmark. This sets the tone for today’s BOE policy announcement and Mark Carney’s first MPC meeting.

It feels like we have been waiting forever for Mr. Carney’s first meeting, the BOE releases have become very mundane over the last few month as rates have been kept on hold at .50% with asset purchases held at £375bln and with the MPC voting 9-0 and 6-3 in favour respectively. The question on everyone’s lips is will Carney have to ability to persuade the MPC members to change their voting patterns, indeed the UK economy is far from what it was in Q1 as it faced down triple dip recession concerns.

We have scaled back our asset purchase views over the last few months and believe Carney will perhaps look to provide Fed style forward looking guidance on rates and policy, that being said this meeting has the greatest potential to surprise and with liquidity in markets lighter than usual moves in the FX markets could be very dramatic.

Data from the Eurozone did not echo the improvements of its UK neighbours, PMI services data for the region missed expectations posting 48.3 indicating an industry still in decline, with the pace of contraction accelerating from the May reading, with the German reading holding just above the contraction level. As always we are getting mixed signals from Europe as Retail sales proved a lot stronger than expected expanding 1% in May versus .3% expected.

Mario Draghi will take the stage as the ECB announce their interest rate decision. We do not expect any changes from recent statements, interest rates are expected to be held at .50%, and we’d also expect him to echo previous statements, remaining dovish, highlighting European concerns whilst standing ready to act should it be required. In many ways the ECB has done their job very well to this point, European contagion concerns have diminished somewhat, Portugal provided a perfect example yesterday at its 10 year yield drifted above 8%, while other peripherals gave up a little ground but held their own.

That being said with plenty of risks still simmering below the surface we are likely to see contagion concerns really tested. Greece has been given an ultimatum to meet austerity measures by Friday or potentially miss a €8.1 bln aid payment. Here at Clear Currency we have long been warning of the risks facing the Eurozone, risks that were discounted by the markets and valuations of the EUR, such risks make effective hedging essential, particularly for those exposed to the EUR and Central bank centric currencies (USD, JPY, GBP).

As mentioned the US is on a bank holiday today but the calm will only last until tomorrow as we await the Non Farm Payrolls and other jobs data. Yesterday’s ADP employment report indicated some 188k jobs were added to the US economy in June, better than the 160k expected, correlation between ADP and NFP figures is very loose but with the NFP expected to post 165k jobs the market will be expecting a surprise to the upside, supporting QE tapering by September.