Market News & Insights
10 October 2013

UK Recovery Hits Stumbling Block

EUR/USD 1.3506
GBP/USD 1.5939
GBP/EUR 1.1802 (0.8472)
EUR/CHF 1.2305
GBP/CHF 1.4523
GBP/AUD 1.6904

The last 24 hours have brought us plenty of fundamental risk and headline generating news and FX markets have proven volatile on the back of this. We warned yesterday that UK data had the potential to surprise to the downside and we were not disappointed. The FOMC minutes were also on tap last night and expectations of the nomination of Janet Yellen for the new Fed chair position, and of course we cannot forget (or leave out) the on going budget talks (or lack of) and debt ceiling concerns in the US.

The pound was one of the biggest movers on the day declining across the board as industrial and manufacturing production both missed their estimates by a long mark. We highlighted GBP concerns last week following weaker than expected PMI’s, all falling lower than expectations. Yesterday’s Industrial and manufacturing production data declined 1.1% and 1.2% respectively, versus expected gains of .4% for both. The UK trade deficit was also larger than expected causing us to question whether such a strong pound is harmful to UK trade.

This immediately saw GBP coming under selling pressure sending GBPUSD back below the key psychological level of 1.6000, essentially reversing all the gains made from last month FOMC meeting when no taper was announced. EURGBP also popped to the top of its recent range looking to test towards the .8500 level. Like all recovery’s at the moment the UK remains fragile, over confidence can be damaging and the reality is that a gradual recovery is in line with the BOE’s guidance, perhaps this time the markets over exuberance got it in front of recovery.

The Bank of England are due out this morning with their monthly rate and policy announcement, we expect no change with the rate kept at .5% and the asset purchase target remaining at £375bln. As is often the case with the BOE we are unlikely to get any details should there be no change and will have to wait for the minutes in two weeks for guidance. With Carney at the helm I can’t help hope he will mix things up and comment but this is wishful thinking.

The minutes from the September FOMC meeting were released last night and the market was keen to see how close the decision was to not taper. Everyone expected it to be a tight call, with several members just looking for some further evidence of recovery to approve a winding down of easing. Most members saw tapering beginning before the years end, with QE winding down completely by mid 2014. This is pretty much as expected, albeit perhaps a little more hawkish than some might have expected.

The lean towards a taper before year end by FOMC members saw the US rally post release but the greenbacks strength was short lived and we saw little follow through to convince us. The reality is that although most members saw tapering beginning by year end, they in all likelihood would not have expected the government to shutdown for at least two weeks and the debt ceiling issue to go to the 25th hour. This could really change people perceptions, we are confident there will be no October taper now and November is very unlikely at this rate. October minutes will be key, but we’ll have to wait until mid November to find out.

The Eurozone is likely happy to be out of the limelight and is plodding along in a gradual recovery. Data released yesterday from Germany saw factory orders stronger than expected posting 1.4% growth in August versus 1% expected. This morning the ECB will publish their monthly report but we would not expect it to deviate too much from the ECB’s statement earlier in the month. Draghi will be speaking in New York later this evening and this may provide the EUR with more lift should he maintain his positive outlook for the region.