We wait for Draghi to reveal his hand…
The Pound strengthened against both the Euro and Dollar last week after speculation that monetary policy in both the U.S. and Eurozone will be slacker for longer than market participants had previously thought. The Pound gained versus most of its counterparts last week after mixed data from the UK showed that the jobless rate fell, while the inflation rate showed a negative tone and growth in wages accelerated less than the market had forecasted.
House price data released yesterday suffered due to the new Stamp Duty levels, but Sterling had recovered any losses by the market open this morning. UK data is due out later this week in the form of Retail sales, market participants are expecting an increase for September. Sterling rose versus the Dollar, gaining 0.8 percent and 0.7 percent versus the Euro, its first weekly advance since mid-September.
This week the focus will be on Europe. Eurozone’s PMI reports and of course the European Central Bank’s (ECB) meeting on Thursday guarantee friction in the majors, so we should be in for an exciting week. We don’t expect the ECB to take additional measures yet, but Mr. Draghi may lay the groundwork for additional easing at the December meeting. The other main events are the PMI business confidence surveys on Friday; a very modest deterioration is expected.The upcoming period for EUR/USD may be more volatile and unpredictable than what was seemingly a one-way street. Continued strength in the EUR/USD cross is likely to force the ECB’s hand to ease policy. Many other EUR-crosses have already started to price in the increasing probability that the ECB will extend the current quantitative easing (QE) program.
Over the other side of the pond, the likelihood of any change of stance in regards to the interest rate are fast diminishing, with the markets only pricing a 32% possibility of a US rate hike this year – down from 64% last month. Global economic concerns are weighing heavily on all Central Banks ensuring caution before any major changes are made to monetary policy.
China released a range of data this morning, which shows no signs of a collapse in the Chinese economy and, as such, brings a little relief to overall very pessimistic expectations. The Chinese data shows a continued rebalancing of growth as apparently the weaker industrial growth has been compensated for by higher service sector activity in order to leave GDP growth broadly flat at 6.9% year-on-year. China is thus managing to continue to create jobs and provide growth in the service sector to compensate for weaker investment growth and industrial activity. This has significant implications for the rest of the world as the service sector is much less import intensive than the industrial sector. It is especially hurting commodity exporting countries such as Brazil and Russia, which are now mired in recession. This is a picture that is unlikely to change much as growth in the future will continue to be driven more by the service sector.