FX markets ignore global data deluge, trade in tight ranges
05/Aug/2013 • Currency Updates•
Expectations for a volatile week in financial markets were disappointed last week. Events of note last week included meetings by the Federal Reserve, the ECB and the Bank of England, as well as labour market reports in Europe and the US. In the end, none of these reports changed dramatically the outlook for economic growth or monetary policy, and currencies traded on extremely tight ranges throughout the week. Beyond FX markets, equities traded up to fresh record highs, and fixed-income instruments were generally soft, in spite of a soft US payroll report on Friday.
The highlight of the week was doubtless the Bank of England MPC meeting on Thursday. As expected, there was no change in monetary policy. More surprisingly, the MPC reverted to its original policy of publishing no statement when policy is unchanged. Therefore, we are no wiser as to whether future policy will rely on macroeconomic thresholds, or whether the MPC is satisfied with current expectations fur hikes in the bank rate. Given this uncertainty, the Inflation Report to be published this week takes on added importance. Aside from monetary policy, the manufacturing and construction PMI indices published last week painted an even stronger picture of the British economy. The far more important services PMI indicator will be published this week, but leading indicators are clearly painting a picture of above trend growth in GDP for the third quarter. Absent a shocker from the BoE in next week’s inflation report, we expect sterling to be well supported by Bristish economic fundamentals.
The ECB meeting also came and went, and markets greeted it with a shrug. Draghi kept rates on hold, and largely repeated the forward guidance from the previous meeting. Beyond monetary policy, eurozone unemployment was steady at a record high 12.1%, and the composite PMI index was confirmed at a level broadly consistent with zero GDP growth. We look next week to Italian GDP and employment, which should provide confirmation on whether the largest peripheral economy is moving from contraction to stagnation as the improving PMIs in the periphery suggest.
Two key macroeconomic releases told divergent stories last week. On the one hand, GDP was revised upwards to 1.7% in the second quarter and to 1.1% in the first, as part of a general re-benchmarking of estimates of the size of the economy. On the other, the key payroll report for the month of July came in softer than expected. The economy created 162,000 jobs in the month, about 25,000 less than the previous three-month average. Though unemployment fell to 7.4%, this was again due more to labour force withdrawal than new job creation. On balance, the July payroll report leaves us on the fence as to whether the taper will begin in September or December. We think the FOMC has not yet made up its mind, and growth and employment data over the next four weeks will tip the Fed’s hands one way or the other. Should we decide to move our expected start for the taper to December from our current September call, we will revise our short-term dollar estimates accordingly.