EUR strength and USD weakness ahead
The Euro continued its recent revival yesterday, making further gains against both the Dollar and Sterling. Last week’s warning by Jean-Claude Trichet, European Central Bank President, that ‘strong vigilance’ on inflation was warranted, has provided the catalyst for a period of Euro recovery that has continued past the weekend. Markets are aware that this is similar phraseology to that used throughout the last euro rate tightening cycle from 2005-2008, and so are pricing in a rate rise by the ECB by April or May, as opposed to later in the year. Weak retail sales figures for the UK, released overnight, have further weakened Sterling against the single currency, after the BRC survey showed like-for-like sales falling 0.4% in February. That fall was in line with weekly data from John Lewis so hardly surprising. The RICS survey suggested that UK house prices were still falling in February, but at a slower rate.
The last notable stretch of Dollar weakness followed the Fed’s decision to embark on a second program of quantitative easing, though it quickly regained strength with European debt problems returning to the fore at the end of the year. Data now suggests that hedge funds and FX dealers are betting record amounts against the dollar, reflecting a growing belief that the currency has lost its safe haven appeal. The US fiscal deficit and concerns about the effect of rising oil prices have been blamed for its slide. The Federal Reserve is now also behind the curve against other central banks in terms of monetary tightening, and will remain ultra-loose in coming months, whilst the ECB and BoE raise rates.
Today, there is no significant data out for the UK, whilst in the eurozone, the ever volatile German factory orders series should show a 2.5% gain in January, reversing the 3.4% fall in December that looks to have been associated with extremely cold weather. Given the inherent volatility in the series we would not be surprised to see an even larger bounce, which would see expectations for industrial production move higher.