Currency Note

Currency waiting game continues

By Callum Holmes February 17th, 2017

low against euro

This week was, over the course of the week, one of sideways movement for currencies. The euro did weaken midweek but has since strengthened to be very close to where it started the week.

UBS has forecast that by end of the this year, sterling could be close to parity against the euro, but, as we should all know forecasts can be very wrong.

Therefore, as we wait for the cards to fall, it has never been more important to speak to your currency trader.

Is GBP/EUR parity still on the cards?

This week we have seen economic data that was slightly disappointing on the whole. The two big figures in the form of inflation and average earnings both failed to hit expectations. What was highlighted was that the rates of inflation and wage growth are now converging. If this trend continues over the next few months, household incomes will be squeezed, having a negative effect on consumer spending. We must take into consideration that consumer spending is a significant part of the UK economy.

The only really significant news flow for the day was that Swiss investment bank UBS has decided to maintain its forecast for GBP/EUR to hit parity by the end of 2017. Despite the resilience of the UK economy, UBS are basing their forecast on an interruption of a “Hard” Brexit undermining that resilience.

Looking at the calendar today we have the release from the UK of retail sales on Friday. This is expected to reverse some of the negative reading that we saw last month.

Euro recovers despite ECB unimpressed with inflation

The single currency gathered strength, slightly, against both the GBP and dollar (USD) yesterday with the minutes of the European Central Bank (ECB) showing  that the monetary policy committee is in no hurry to reduce its Quantitative Easing (QE) programme. The ECB blames the recent encouraging uptick in inflation simply on energy price rises. Mr Draghi, ECB President, said that a “steady hand” was required to encourage stability.

The week ends with a quiet day for the euro, with a low level data releases including Eurozone Construction Output.

Are foundations being set for another bout of dollar strength?

Much of the focus this week has been on The Federal Open Market Committee (FOMC) Chair Janet Yellen’s testimony in Washington. The key themes to take away from the semi-annual testimony is that in sentiment the FOMC is still hawkish, and unlike last year is still intending to raise interest rates at least three times this year. As a result the market is currently pricing in a rate hike for June this year and raised the possibility of a hike as soon as March. Currently 0.75% of interest rate hikes is priced in for 2017.

Economic data this week also backed up the tone from Yellen and the FOMC. Inflation ticked higher, despite the stronger dollar, while the retail sales numbers were extremely positive as the core figure (excluding cars) doubled the forecasted number. The manufacturing index out of Empire state and Philadelphia pushed higher while building permits picked up.

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