EUR gains on factory data as ECB policy meeting looms

Tom Tong05/Νοέ/2013Currency Updates


A good day for sterling yesterday as we saw it gain strength against the dollar and hovered near a 2.5-week high against the euro. The gains coupled from stronger than expected UK construction data and noises over possible monetary policy alterations in the US and Europe.

The construction data was pleasing for the wider U.K economic resurgence. Construction PMI was forecasted at 58.9 but it came in at 59.4. Ultimately the construction and more specifically property market are key to a continual economic recovery. Although house prices are still 7% from pre-recession levels, construction is now at its highest levels in 6 years. Considering the littering of new builds across the South East and canopy of cranes over London this will come as little surprise to many.

Sterling gains against the greenback were limited. Following last week’s FED meeting the market is still jumpy over the December meeting. We have 2 more NFP releases this year but although an alteration in QE is unlikely, if the data is far stronger than expected it still would be a possibility.

Although sterling hit a fortnightly peak against the euro, the gains are nothing to garner excitement and resistance levels are increasingly coming into play. Any notable movement will now hinge on whether we see a rate cut from the ECB. With last week’s euro inflation data producing rapid ripples this is a very real possibility. The last thing the eurozone needs is the horror of deflation and the ECB may well cut rates to extinguish this threat. Similar to the situation in the U.S any alteration is being called for December as this is when both the ECB and the FED will be able to review vital macro data releases. However, the ECB will meet this Thursday so the build up will doubtless see an escalation in chatter over a potential rate cut.

Data releases of note out of the U.K today include U.K retail monitor and Halifax house prices.


The euro’s spectacular ascent over the past months has led every tier of data release to be heavily scrutinised with the market acting accordingly. This was much the same yesterday with eurozone manufacturing PMI stimulating a brief rally. However, the majority of these gains have retraced overnight.

The euro gained against the dollar, whereas against sterling it was fairly flat and eventually ending the London trading session slightly down. Importantly the euro clambered from a near 7-week low against the dollar after data showed the pace of manufacturing was positive. Euro factory floors are staying to pick up, Markit PMI was called around the 50 mark, however came in at 51.3. The modest gains reinforce that although gathering strength, the eurozone economy is still in the grips of a fragile recovery. The eurozone is still hanging onto the coat tails of the UK and US recovery which are significantly better. US and UK growth is a result of considerably more aggressive monetary policy fueling the growth in demand. The eurozone still has plenty of work to do prior to being in a comfortable post recession position. Indeed it is only the 2nd quarter of this year that the euro broke through the shackles of recession so the recovery is still very much in its infancy.

Presently the market is fixated with the ECB meeting this Thursday. This is putting the euro under pressure. Last week’s inflation report is a chronic concern. The ECB at some point will have to act to counter the horror of deflation which could easily lead to a dip in the recovery. The question is if they will alter monetary policy to do this, and furthermore the timescale of action. Heavy focus will be placed on the tone of the meeting and investors will be primed to react to any flag from Draghi that a cut is on the cards.

Important data out of the eurozone today includes-Producer Price Index and the European Commission growth forecasts.


Poor day for the dollar yesterday as it dropped against sterling and the euro. However, minor losses and slight gains seen overnight.

Yesterday saw the dollar bounce as increasingly investors believe a shorter timescale on QE tapering is likely. The FOMC will meet next December which will be the last chance for them to alter monetary policy prior to year end. With any alteration running in parallel to improved data we will need strong Tier 1 data releases to initiate change. With only 2 NFP left to drop this year, the debate is very much focused on whether the FED will have enough data to be confident tapering is necessary. The last thing the U.S economy needs or wants is a change in monetary policy if the market feels it is premature. Even if we see no change next month the market will likely pivot on the tone of the meeting.

Although yesterday was poor for the Dollar it was a positive day for the FED and market confidence in the FED’s ability to control monetary policy and fuel the recovery. Yesterday saw the release of the FED balance sheet and furthermore their expansion plans for the balance sheet. Fears of inflation triggered by the Fed’s balance sheet expansion now appear misplaced. Upon reviewing the release yesterday it would appear that a balance sheet expansion now gives the Fed a powerful weapon should future inflation rise. A chief concern of the market is that QE will lead to increased inflation. However, for the meantime it will appear this has not been the case.

Data releases of note out of the U.S today include the Redbook chain store sales, which will be closely examined to see how consumers reacted to the shutdown, also we have ISM non manufacturing.


Written by Tom Tong

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