GBP/EUR 1.1790 (0.8485)
Well the inevitable happened yesterday, the market’s complacency all week has been justified and Washington has succeeded in ending the government shut down and extending the debt ceiling – for now. As expected and discussed throughout the last couple of weeks the government will now receive funding until January 15th, with the debt ceiling limit extended to February 7th. The Republicans have conceded and certainly come out the worst for ware and weaker for it. They achieved almost nothing with their shut down, dropped down the polls and have cost the US approx $24 bln as a result.
The market’s reaction was as expected with sentiment rising and equity markets advancing close to 1.5% in the US, a positive tone that continued overnight in the Asian session. We initially saw USD rally against its more liquid counterparts, with GBPUSD and EURUSD both breaking to fresh monthly lows.
The USD however sold off against emerging market currencies as sentiment picked up and overnight and early this morning the USD has faced selling pressure across the board. With the uncertainty clear for now markets are now looking towards the health of the US economy, the impact of the shutdown and the possibility of a Fed taper before year end. The early indications are not positive, last week’s jobless claims already showing an impact and today’s release should provide further clarity. Probability for a Fed taper before year end has dropped considerably and a weaker USD is likely to prevail until we see some further US strength.
The pound found some early strength yesterday on the back of far better than expected jobs data, the unemployment rate remained at 7.7% but jobless claims fell 41.7k versus 25k expected, with the claimant count falling to 4% from 4.2% expected. Recent inflation figures and yesterday’s release have supported the pound after a weaker run of data for the first two weeks of October. Retail sales are due out this morning expecting to show a .3% increase for September, from -1% in August.
The Euro has been performing admirably throughout October, picking up from recent lows against GBP and driving towards fresh highs versus the USD, it shows there is some home in the sustainability of the regions fragile recovery. We mentioned yesterday that some of the single currencies strength may come from its demand as an alternative reserve currency to the USD. Mario Draghi’s comments to do whatever it takes to support the single currency still carry’s weight and the ECB’s cautious optimism is also winning fans, even me.
We still see risks to the region and they are clear, peripheral performance, unemployment, Greece, these issue have remained the same for the last 4 years but we also see some other possible downsides for the single currency.
Yesterday’s inflation figures came in as expected at 1.1% and remain very low, the ECB’s target is 2% but like the UK this is a loose agenda. The issue with low inflation is that without price growth the recovery risks stalling, hence action from the ECB would not be surprising. They have certainly alluded to it in the past and for now the appear to be playing it by ear but there is room for further action, be it rate cuts (which have been discussed) or some form of bond purchases.