With the ECB printing money, and communists in charge of Greece ... Whats next?

Week Commencing Monday 25th January 2015


This Week in Brief


In the UK we are looking out for a reasonably positive growth figure of 0.6 percent for the fourth quarter of 2014. With a quiet week for Sterling, expect it to hold some ground against the USD, while continue to test to the upside against the EUR.


In the US we have a busy week, headlined by the FOMC and GDP. We expect a consistent message from the FOMC, while GBP should be reasonably bullish. With this in mind, expect the Dollar to continue to put pressure on most majors.


In Europe we expect continued downside risk, especially given the recent election result in Greece. German IFO could provide some much needed EUR rest bite, but in general EUR weakness is the theme.


Overriding Market Themes


The European Central Bank has launched a programme of emergency sovereign bond purchases in an attempt to pull the beleaguered Eurozone out of the grip of deflation and economic stagnation. The QE scheme, unveiled by the ECB’s president Mario Draghi, was larger than financial markets anticipated, instantly giving a boost to company share prices across the continent. Mr Draghi confirmed the central bank would purchase EUR 60 billion of Eurozone sovereign bonds and other safe financial assets, every month between March and September 2016, or until inflation is back to the central bank’s target. This implies therefore that the total program is worth around EUR 1.1 trillion, or around equal to 10 percent of the Eurozone’s GDP.


In more good news for financial markets, Mr Draghi confirmed that there was a large majority on the ECB’s governing council in favour of triggering the bond buying program. Indeed, so large that they did not require a vote! In what is likely to be seen as a concession to Germany, the risk of the sovereign bonds defaulting will not be shared equally between the 19 members of the Eurozone. Instead, 20 percent of the risk would be collectively shared amongst the member states, leaving 80 percent on the books of national central banks.


The objective of the monetary stimulus programme, which almost identically mirrors the QE programmes that both the US central bank and the Bank of England put in place back in 2009, is to push consumer price inflation in the single currency back up to the ECB’s official 2 percent target. Will this ultimately save the European project? Who knows, however with Draghi’s “whatever it takes” card being finally used up, the currency union may well be down to its last lifeline!


In further shock news, fears over persistent low inflation in the UK has forced the Bank of England’s two hawks to drop their calls for an interest-rate rise. Monetary policy committee members Martin Weale and Ian McCafferty, both of whom have been voting for a rate rise since August, made a dramatic U-Turn after the Bank’s official Consumer Price Index inflation benchmark slipped to an almost 15 year low of just 0.5 percent in December. To put this into perspective, just two months ago, the Bank forecast the CPI at 1 percent in the first three months of the year! Sterling sank instantly against the dollar, sliding 0.7 cents to GBP/USD 1.5094 as traders bet that a first interest rate rise from the MPC since 2007 was now an even more distant prospect. Looks like therefore those green shoots of a recovery we were all enjoying last year may not have been so green after all!


Finally, early Monday morning saw a “as expected” win for the Syriza party in Greece, plunging the Eurozone into another volatile era of political uncertainty. More than five years into the eurozone crisis that started in Greece in 2009, and raised questions about the single currency’s survival, Greek voters roundly rejected the savage spending cuts and tax rises imposed by Europe’s troika. .


GBP This Week


UK GDP will be the key release this week and is likely to show continued economic momentum for the country. We are forecasting growth of 0.6 percent in the fourth quarter of 2014, pushing our year on year figure to 2.8 percent. As in the previous quarter, growth will likely be driven primarily by services, with other sectors making limited contributions. Robust UK economic growth, and its positive impact on inflation continues to provide some very mild support for GBP this week. However, current very low rates of UK inflation, coupled with a dovish Bank of England and growing election risks, are likely to reverse this short term trend and weigh on GBP in H1 2015.


USD This Week


There is a busy week ahead for the US with the FOMC rate decision on Wednesday, coupled with a series of key data releases such as durable goods, new home sales, consumer confidence on Tuesday, and Q4 GDP on Friday.


Sticking with the FOMC, despite recent downside inflation and wage data recently, we believe they will maintain their existing policy stance and make very little changes to their statement. They may well comment on the recent decision by the ECB to enact its QE program, and with this in mind expect some continued pressure to be placed on EURUSD as we drawn towards the end of the week.


On the data front, Q4 GDP will be the highlight and we expect another solid posting at around 3.1 percent annualised. New home sales should come in at consensus, with the market expecting a posting of 450k while consumer confidence should come in around 95.0. With this in mind, we expect broad support for the Dollar this week, especially against low yielding currencies and of course, the EUR.


EUR This Week


It has been a tumultuous week for Europe, with the Greek elections likely to continue to present downside risks for the EUR. Moving away from the election however, the focus for the EUR next week will centre on the January flash estimate of euro area inflation on Friday. We expect inflation to have declined -0.6 percent in January, down from -0.2 percent previously. We expect core inflation to remain unchanged at 0.7 percent year on year.


The January German IFO business climate index  on Monday may create some volatility in the FX space. We forecast the business climate index to increase to 106.8 from 105.5 in December.

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