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TERRIBLE UK WEATHER NO REFLECTION OF THE MARKETS

TERRIBLE UK WEATHER NO REFLECTION OF THE MARKETS

Whilst we spent yesterday under an umbrella the Euro recovered all the ground gained by Sterling by Friday’s close. Last Wednesday’s comments by the ECB’s Praet that the ECB could expand or extend QE if necessary as inflation was forecast to average at 0.3% for 2015 might almost have been made too soon with yesterday’s results.

Euro CPI defied expectations of a fall and remained at 0.2% year on year, and the core CPI remains at 1%. Italian CPI and German retail sales beat expectations and the lack of competing UK data meant that since the weekend the Euro was over 1% stronger by the time markets opened this morning.

Further drops in commodity prices, especially in crude oil, pose downside risk to ECB’s inflation target, but the evidence seems to suggest this effect has been absorbed into current pricing, for the moment…

Sterling seemed to have found a level of support in thinly traded markets over the Bank Holiday weekend, gently halting the gains seen by the US Dollar over the last couple of weeks. The key focus came stateside at the Jackson Hole Conference on Saturday as traders digested the topics of discussion, particularly the US inflation outlook.

As we all know by now, for much of the year and particularly in the last few months, the interest rate race between the UK and the USA has been a focal point with the US expected to “win” the race by raising the interest rate this month. The Jackson Hole Symposium brought the aforementioned US inflation outlook into play with the Fed quick to reassure market participants that inflation, although largely under-performing for some time now, isn’t a huge concern for the panel and there is good reason to believe that inflation will move higher as forces holding it down dissipate.

This prompted some investment banks to stand by their forecasts that a rate hike could still come this month – following the recent market volatility, many had begun to second guess. The market will be on somewhat of a knife edge this month for this reason, so expect price action to be sensitive to news around language used by the Fed on interest rates and inflation.

Today’s session also marks the beginning of a shortened week in the global FX markets, as far as UK investors are concerned, but there’s no lack of data releases. Today’s session is particularly release-heavy and analysts forecast significant changes in the relative value of the Pound Sterling against the other sixteen most actively traded global currencies as a consequence.

Germany’s headline unemployment figures lead the way today and if economists’ forecasts are correct, the Euro could come under renewed selling pressure. The July rate of joblessness in the Eurozone economy stood at a relatively high 6.4% last month and analysts forecast that this morning’s seasonally-adjusted data will show no reduction. This data was released earlier this morning and came in on forecast leaving this morning’s trading relatively flat. Later today we will see the US release data in the form ISM Manufacturing survey for August. A marginal improvement from July’s showing of 52.7 is anticipated.

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