Sterling continues on the up as the doves take refuge in the ECB!
Week Commencing Monday 6th May 2013
Overriding Market Themes
After a big week for Sterling news, we have found that confidence among UK businesses is continuing to improve, despite slower the desired growth in the economy. With forecasts for Q2 growth already projecting a further rise to 0.6%, it seems that George Osborne can finally break out a smile. This could not come at a better time as the IMF delegation is set to arrive in the UK later this week for talks with the government. Will they be able to persuade the treasury away from their ferocious austerity plans, unlikely at this stage! The recent growth in the economy, and the avoidance of a triple-dip recession, is widely seen to have strengthened the chancellor's case for austerity.
Across the pond, US employment rose more than expected, with the April non-farm payrolls showing that a whopping 165,000 jobs were created last month (economists had projected 145,000). This pushed the unemployment rate down to 7.5%, which is the lowest the indicator has been for 4 years. The strong increase in the jobs figures provided a boost to the markets, with risk on trades boosting many European/US equities and currencies. Some analysts still remain sceptical on the US however, despite the recent swath of strong economic numbers. We have seen unemployment rise in some key sectors, especially in construction, whilst payrolls in the manufacturing sector remained flat. It seems that even the world’s biggest economy may not be entirely out of the woods, just yet.
Closer to home, Retail sales across the Eurozone have fallen for the second month in a row in March, prompting fresh fears over the state on the EMU. The volume of sales fell 0.1% on the month, after a 0.2% drop in February, whilst the year-on-year figures show a worse than expected -2.4% drop. This comes as the European Commission forecast that euro-area growth would shrink by 0.4% during 2013, down from 0.3% forecast in February. A forecast that takes into accounts the areas difficulty in creating jobs and stagnant economic growth. According to the Eurostat group, Spain saw the biggest drop in sales, with the figure posting a decline of 10.5% compared with the same month last year. All this is being reflected in the statements released by the European Central Bank, which lowered its benchmark interest rate to a record low of 0.5% last week. As unemployment across the region heads higher and higher (with the last euro average reading coming in at 12.2% unemployment), the situation across the channel continues to be the main drag on global confidence.
GBP This Week
With a four day week ahead of Sterling, most of our focus will be on the Bank of England’s monetary policy statement on Thursday. The MPC left the asset purchasing facility flat at GBP 375 billion for 11 months now, yet more and more members have been seen voting for further expansion of late. We do not believe that any adjustment to this figure will be made this month, especially as the UK has posted some exceptionally strong figures recently. The number of members that descent however, will be very interesting. We then move to manufacturing production rate for March is due, where markets forecast a reduction in growth from 0.8% to 0.4%.
We are slightly more bullish on the Pound now, especially after the ground it gained against the US Dollar last week. With British PMI releases all pointing upwards, whilst US data remains puzzling and EUR data remains dreadful, we expect more gains to come. That said, the recent downgrading of UK debt by Fitch underscores concerns about the health of the economy, but the markets will be happy to change their tune if UK releases continue to improve.
USD This Week
The US has a largely quiet week ahead, with very little market moving data scheduled to be released. The unemployment claims figure on Thursday hopes to follow on from last week’s strong Non-Farm Payroll release. However, the weekly figure is expected to indicate an increase in the number of Americans unemployed, potentially with an increase of 333k from 324k last week.
With the Dollar losing some of its ‘golden boy’ image to Sterling recently, we are moving our position from long to neutral. With this in mind, we expect GBP/USD to continue to gather support at its current level. As a warning however, the Federal Reserve has showed little willingness to add more Quantitative Easing, and recent employment data came in better than expected. Dollar appreciation (especially against the flagging Euro) is certainly not off the cards.
EUR This Week
Again, this is a quiet week for the Eurozone, with PMI figures released on Monday proving one of the very few highlights of the week. Eurowide services PMI saw a slightly better than expected release, coming in at 47.0 vs a market expectation of 46.6, indicating that contraction in the sector is slowing down. Later in the week, the industrial production figures are due out for Germany and France. We do not expect anything out of the usual here, with both predicted to be showing a negative figure. However, none of these releases are predicted to have any significant impact on the markets, with most seeing an increasingly dovish standpoint from the ECB as the dominant factor in EUR movement.
With the ECB acknowledging the worsening situation throughout its members economies, and the cut in rates, things still look as though the crisis is far from over. With the hint of negative rates, the pressure on the euro should continue, especially when coupled with the various debt-crisis related issues currently filling the press. GBP/EUR has consistently tried to break through the 1.19 level, and this week’s stands as good a chance as ever. Against the Dollar, support over the hugely psychological 1.30 level is beginning to break down.
In Other News
Rumours of chemical weapon deployments in Syria continue to present the west with a moral dilemma. With the civil war raging, unconfirmed reports suggests that rebels have used the nerve agent, sarin against government forces. This, coupled with Israeli air strikes against on an apparent missile convey bound for Hezbollah, escalate the tension in the region.
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