GBP/EUR 1.2158 (0.8225)
Last week’s wobble in emerging markets steadied somewhat with an emergency meeting announced by the Central Bank of Turkey (CBT) and stronger than expected Asian data, as well as a surprise hike in interest rates to 8% in India. The CBT are expected to announce a massive hike in interest rates, by as much as 250 bps. We may see other EM central banks following suit with other rate hikes.
The rapid depreciation of the Argentinian peso last week caught press attention and put other EM currencies on a slide but emerging market currency weakness should not be a surprise as it is something we expect to continue throughout the year as the US, UK and Europe continue on their paths to growth and closer towards policy normalisation. We discussed this a number of times last year and do not see it changing dramatically unless there is a considerable slowdown in the US/Europe.
GBP continues to trade firmly despite Carney’s comments from Davos about changing forward guidance and seeing no reason to raise rates at this time. This will lead us into today’s release of UK GDP; the fourth quarter is expected to have grown at a rate of .7%, bringing the annualised figure to 2.8%.
Given the amount of positivity behind the pound and ever increasing interest rate hike speculation this release has the ability to bring significant volatility to GBP pairs. The pound strength comes from the belief the UK will be raising rates a lot sooner than initially guided, should rate hike expectations fall back in line the pound will be coming into some severe selling.
Greece will always be the elephant in the room when we discuss Europe and it is not going anywhere any time soon. That means it still carries the potential to impact the region, although markets have been somewhat numbed to systematic concerns in the region but there is still a stand off between finance ministers on the nation.
The EUR has been trending down from Fridays highs so far this week but not outside current risk trends. The German IFO survey of business confidence beat expectations as we expected, reaching close to a three year high. The EUR was little changed on this news, as it was little changed on the negative news that an OECD study suggests the Eurozone banks face a capital shortfall of €84 bln.
Yesterday’s revival of Emerging market currencies from a heavy week of selling saw the USD on the back foot, giving back some of the ground gained from the risk aversion move seen towards the end of last week. The USD is likely to ebb and flow on risk trends until we have the FOMC release but there is some data to drive these risk trends today. US durable goods orders and Consumer confidence data will drive USD direction into tomorrow’s release.