Euro rises as ECB signals cuts not on the agenda

Tom Tong10/Μαρ/2014Currency Updates

Financial markets ignored almost completely the tensions between Ukraine and Russia last week. The short-lived dip in risk assets that we saw on Monday was eagerly bought by investors. Most stock markets and commodities ended the week notably higher. Even the Ruble managed to end the week with only a modest pullback against major currencies.

G10 FX traders largely looked past the geopolitical tensions and focused on economic and policy events. These pulled in opposite directions last week. While the ECB buoyed the Euro by sounding blasé about the risk of deflation in the Eurozone at its monthly press conference, the US payroll report painted a rather strong picture of the US job market and all but assured another «taper» of $10 billion dollars per month at the FOMC March meeting. In the end, the Euro won out and finished the week near two’year highs against the dollar.


Economic indicators continue to point to strong expansion in the first quarter of 2014. The PMI composite survey of business sentiment remained almost unchanged at just above 58, a high level consistent with annualized growth in the 2-3% range. There is little if any evidence of a weather effect in these numbers.

A potential worry for the Bank of England is the surging strength in mortgage approvals. While still some way below average, housing market volumes have been increasing fast, as have house prices. We think the BoE will have limited tolerance for another round of froth in the housing market. We think it is quite likely that the FPC will recommend curtailing the Help to Buy scheme sooner rather than later. However, we think UK authorities will not use the blunt tool of rate hikes to control potential bubbles in the housing market, and think that the timeline for hikes will not be affected by developments there.


ECB President Draghi painted an optimistic, almost self-satisfied picture of Eurozone conditions at the spot-meeting press conference on Thursday. He dismissed fears about deflation pointing to his staff forecasts of 1.7% core inflation *in 2016*. Clearly, the ECB’s notoriously dismal forecasting track record has done nothing to dent its self-confidence. Given the slow-moving, inertial nature of inflation data, and the even slower-moving nature of European policy making, it will probably be at least a couple of quarters before deflationary pressure changes the ECB’s stand and therefore we expect no significant change to the ECB stance until the third quarter of 2014.


The March payroll report should allay most fears that recent softness in US macroeconomic data portends a significant cyclical slowdown in the economy. The headline number was net creation of +175,000 jobs in February, with positive revisions to the prior two months. The parallel household survey showed an uptick in the unemployment rate to 6.7%, but this merely reversed part of the large drop seen in the previous months. Hourly wages were up a strong 0.4% on the month; real wage growth has turned solidly positive for the first time in some years over the past few months.

This solid data in spite of bad weather removes any possibility of a slowdown in the pace of «tapering» when the FOMC meets later in the month, and supports our view that US growth is likely to accelerate to the 3% level throughout 2014.


Written by Tom Tong

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