Strong data buoys Sterling; Euro on hold awaiting resolution of Greek crisis

Enrique Díaz-Álvarez09/Φεβ/2015Currency Updates

Tension reigned over the G10 currency markets last week. The Euro traded in a relatively tight range against the Dollar, driven mostly by the latest rumours and declarations from the Greek Government and their Eurozone interlocutors. All of the Euro’s gains for the week were given up on Friday after a very strong US jobs report appeared to seal the case for a mid-year Fed hike. Sterling put on its best performance in a while, as PMI surveys suggested a broad-based strengthening in the UK economy. In the absence of any key policy announcements from major central banks, we expect next week’s currency trading to continue to be focused on news from Greece and its negotiation with Eurozone authorities.


The PMI business sentiment indices out last week gave an unambiguously positive signal about the UK economy. Both the services and manufacturing indices are now above their long term average, consistent with above trend GDP growth closer to 3% than to 2%. The very high services employment sub-index should be particularly encouraging for the Bank of England, which at 57.1 is very close to a record for this economic cycle. Next week’s Inflation Report will be closely scrutinised to see if the bank revises its unemployment forecast downwards as a result of recent labour market strength. Should it do so, it would send a clear signal to the markets to expect an interest rate hike before the end of 2015.


While markets continue to focus on the outcome of the negotiations between the leftist Greek Government and Eurozone officials, we have noted a modest but real turn for the better in Eurozone economic indicators. The all-important PMI business sentiment indicators (measured by the composite index) increased over a point to 52.6 in January. The details were even more encouraging, as expectations surged by 4.2 points. Further, the retail sales report showed another 0.3% MoM, sustaining a solid pace of over 3% annualised growth and reflecting the positive impact lower energy prices are having on consumers’ spending power. Lending data also leaves some room for optimism, as the ECB report showed lower rates, easier lending standards and even a modest pickup in the demand for credit. Overall, we maintain our expectations that the Greek situation will be resolved without serious incident and the Euro will stabilise at least over the short term.


The US job market continues to accelerate. On Friday we were treated to what was the strongest payroll report of the current expansion. 257,000 jobs were created in January, and there was a massive upward revision to the previous two month’s numbers. The three month average is now well north of 300,000. The unemployment rate edged up, but paradoxically this is actually good news as the increase was driven entirely by workers re-entering the work force, a sign that job market slack is running out. Wages rebounded from their December drop, up 0.5% on the month and a solid 2.2% on the year. Job creation, increased labour force participation, real wage increases – the Federal Reserve will no doubt be pleased by these developments and we think the FOMC is on track to deliver its first interest rate hike at its June meeting.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.