Sterling rises and dollar recovers with Yellen providing no surprises on QE

Tom Tong15/Νοέ/2013Currency Updates


Sterling was popping up and down against its most traded pairs yesterday following a brief pullback stemming from retail sales coming in lower than expected. Initially it hit session lows against the greenback and was slipping against the euro. However, the market is not overly concerned, retail sales are notoriously volatile and a wider market view alludes to incredibly strong prospects for UK growth. Sterling quickly corrected and closed London trading up against both the dollar and euro. Also there were huge rises against the Yen following shocking data out of Japan. Ranging in Asian trading, London opens with the pound well supported.

Retail sales coming in lower than called will do little to alter market expectations over when a BOE interest rates and QE alteration is likely. Sterling has risen in recent months over increasing expectations that an ascent in the UK economy means interest rates will rise sooner than originally anticipated. This view was stoked on Wednesday after the unveiling of the BOE inflation report. The report stipulated that unemployment could hit 7% as early as Q4 2014. This was an 18-month revision over original BOE expectations and now holds a parallel with the general market view. The date is key as 7% is the level at which the BOE will consider altering interest rates. The bullish outlook saw the pound spike up half a cent against both the euro and dollar and it has continued to trade at strong levels.

No data out of the U.K today.


More misery for the euro yesterday. Q3 GDP continues to portray a fairly bleak outlook. Euro fell down against sterling and dollar and its most traded pairs. More than anything the data underlines the fragility of the recovery. Growth in the eurozone is treading on thin ice, expanding a minuscule 0.1% Q3 after 0.3% in Q2. The figures coming just a week after the ECB interest rate cut, drawing further attention to the haunting threat of deflation. We now have certain countries shrinking with France and Italy both seeing contractions. With only 0.1% growth we are a whisker away from things grinding to a halt. Germany and Spain provided some respite with both economies achieving respectful gains in growth. The eurozone is still suffering from crippling high levels of unemployment with the 2014 budget geared towards lowering unemployment levels. Furthermore, adding to the concerns are low inflation in the eurozone, with Spain yesterday posting figures which in fact showed deflation.

The market was stunned when the ECB cut benchmark interest rates to 0.25, but it now looks increasingly like this drastic measure made sense. Eurozone CPI is due for release this morning.


Dollar dipped against the pound as sterling continues to see support from UK bulls. Up against the euro taking leverage from soft eurozone data.

Another day, another dollar debate. Eyes were peeled to Yellen’s nomination hearing yesterday. The market was itching for an insight into how Yellen feels over the pace of QE and the extent of her dovish stance. The outcome was somewhat of an anticlimax, clearly Yellen is still uber dovish other than that we didn’t learn a great deal with Yellen speaking for a long time and not giving a great deal away. What we did see is a clear defense of QE and a refutation of the idea that the unemployment rate is the key labor market number. Yellen feels the participation rate is a stronger and more reliable indicator for wider recovery. Presently the amount of working age and ability is the lowest since 1978, equally during the recession many jobs were lost and employees forced into early retirement. Evidently the participation rate is an ongoing concern for the FED. Accordingly it is not hard to draw the conclusion that Yellen would support continued full speed QE until broad measures of the labor market clearly are improving.

QE timescale remains elusive with Yellen giving no indication on whether the FED should look to taper and if so the likely date. Most in the market still calling the taper for Q1 next year. Wider data out of the U.S yesterday was mixed. Initial jobless claims dipped marginally to 339k from 341k, general trend seems to be around 340k. Productivity rose at an annual rate of 1.9%

Elsewhere an unfortunate timing clash, yesterday Moody’s cut the credit ratings of Morgan Stanley, Goldman and J.P saying that the government was less likely to bail them out of if they got into difficulty.

Data releases of note today include Import prices, empire state survey, industrial production and wholesale inventories.


Written by Tom Tong

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