Market News & Insights
23 January 2014

UK Forward Guidance Needs a New Marker Carney

EUR/USD 1.3631

GBP/USD 1.6606

GBP/EUR 1.2180 (0.8207)

EUR/CHF 1.2321

GBP/CHF 1.5008

GBP/AUD 1.8872

It has been a quiet week for the Eurozone so far, the only data of note from the region this week has been the German ZEW survey which was to the downside of expectations at 61.7 versus a forecasted 63.4. While the unexpected fall in this figure was the first in 6 months, it was still almost double the previous year’s figure for this time of year.

Today we’ll get a clear gauge to see whether this was just a blip in the German confidence regarding the outlook for the euro area’s economic recovery as we have German PMI Manufacturing and Services out early this morning. German Manufacturing data has been above the key growth figure of 50.0 for 6 consecutive months and with an upward revised figure of 54.7, a triumph would make Tuesday’s ZEW figures a distance memory.

We also have Eurozone PMI Manufacturing and Services data out this morning. Both figures have been revised upwards and positive results here would help build confidence in the fragile region and help support the expectations for a steady emergence out of recession.

To the UK, and yesterday we saw unemployment plunge to 7.1 per cent down from 7.3 per cent during November, leaving the Bank of England’s forward guidance policy under scrutiny. These latest figures show the fastest drop in over 15 years with the labour market improving at an unexpectedly rapid rate. The figure puts Mark Carney in a difficult position in the sense that only six months ago the Bank of England autumn’s inflation report, stated that when unemployment fell to 7 per cent it would assess the historically low interest rate of 0.5 per cent and that was projected not to happen until 2016.

This has forced the BOE to admit that it was wrong in the latest policy meeting minutes, released yesterday. Sterling rallied sharply yesterday on the back of unemployment figures, the break of 1.65 represents quite a strong signal for GBP/USD to exceed January’s peak at 1.66 and then move towards 1.67 on the other hand, an expected firmer EMU PMI survey may trigger some short-covering on EUR/GBP and thus pull it back above .8225.

The US has also been relatively quiet this week, today however we have a little more action. The weekly US unemployment claims are due out this afternoon and are expected to rise to 331K. We also have US PMI Manufacturing data, where expectations are for a reading of 55.2. This figure is a big ask, as we have not seen the figure above 55.0 since February of last year, and has only been above the level twice in the past 2 years