Crunchtime for the ECB ... to print or not to print?

Week Commencing Monday 30th November 2015

Overriding Market Themes

We start this week with news that China is close to securing its currency as the fifth member of its special drawing rights basket. Once accepted, it will join an elite group of the world’s most heavily traded currencies, the US Dollar, Euro, Sterling and the Japanese Yen. China has been lobbying to the IMF to add the yuan to its basket of reserve currencies, which it uses to lend to sovereign borrowers. China hopes that this stamp of approval will increase the yuan’s desirability as a reserve currency for investors and undermine the domination of the dollar as the global reserve currency. The SDR basket determines the mix of currencies that countries like Greece can receive as IMF disbursements and economists expect that inclusion will boost demand for the yuan.

Moving to the UK, Sterling fell to a three week low against the greenback on Friday after data confirmed the UK economy slowed in the third quarter, reinforcing market expectations that the Bank of England will not raise interest rates in the near term. Despite upbeat growth forecasts from the OBR this week coincided with George Osbourne’s spending review, Friday's GDP print showed the UK economy grew just 0.5 percent in the last quarter, slowing from 0.7 percent the previous quarter. Sterling did feel some relief as Osborne eased some spending cuts and dropped the very unpopular plan to scrap tax credits for low earners. Many are now saying that the age of austerity is over, however we still believe that the government will continue its cost cutting program, further weakening Sterling’s position. Also, as polling continues to teeter around the “no” camp on the EU referendum debate, we expect to see some further issues for Sterling moving into the medium to long term.


GBP This Week

We have the usual raft of UK PMI figures out this week, with manufacturing PMI kicking off the show on Tuesday. We expect to see a fall to 53.1 from last month, which should continue to keep Sterling under pressure at the start of the week. Services are also out on Thursday, and we expect another drop to 54.3 following last month’s disappointing print. Furthermore, we expect the November construction PMI to also print negative, albeit marginally at 58.5 from 58.8 in October.

Apart from the above, it is reasonably quiet from the land of hope and glory! We expect Sterling to continue to perform well against the Euro, especially given the ECB’s continued dovishness and expected QE extension. The opposite is true however when looking at Cable, with a FOMC seeking to increase rates and an ever pushed back Bank of England, we should see some significant 1.50 testing this week.

USD This Week

We have a raft of Fed speakers this week, with Evans, Lockhart and Williams speaking on both Tuesday and Wednesday. As always, their speeches will be analysed thoroughly to find some hints the rate hike is on this coming month. The market will pay particular attention to Chair Yellen’s testimony before Congress on Thursday, as it focuses on the economic outlook.

The Employment report is probably the highlight of the week, were we expect nonfarm payrolls to increase 200k while the unemployment rate should fall 0.1 percent to 4.9 percent in total. This would represent a solid print and continue to boost the US Dollar and rate hike expectations. Indeed, this is the last major release we will see before the FOMC in December.

The Dollar should continue its upward trend this week, especially given the ECB is set to deliver further easing in contrast to the bullish FOMC and solid jobs numbers.

EUR This Week

Thursday’s ECB meeting is the highlight of the week, with a cut in base rate of 10 bp expected by the market coupled with an extension of their QE program. Given the unpredictability of this central bank however, all we can promise are some choppy markets.

On the data front, we expect HICP inflation on Wednesday to have increased to 0.3 percent in November. Meanwhile, core inflation should ease to 1.0 percent from 1.1 percent, confirming the imminent need for additional ECB stimulus. Finally, we expect Euroarea PMI on Thursday to remain unchanged at its current level.



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