Euro scores another weekly gain amid volatile trading
30/Mar/2015 • Currency Updates•
The Euro rebound continued last week, as major currencies continue to trade in a volatile fashion. The key Euro-Dollar cross traded in a wide range of almost 3%, while Cable remained more subdued and actually ended the week down 0.5%. The perceived dovishness of the Fed at its March meeting, combined with softer than expected reports from the US and strong indicator data from the Eurozone, appears to be driving the bounce in the common currency.
A critical question for FX markets is whether the recent slowdown in the US is a temporary result of the exceptionally harsh winter, or a harbinger of a more sustained cyclical slowdown. This week’s payroll report from the US takes on added importance to resolve this question. Traders will be on Easter holiday in much of the world when the news is released, which will drain liquidity from markets and could add to the traditional post-payroll volatility.
Inflation in the UK slid to a record low of 0.0% YoY in February. This was in line with expectations, and is likely to prove the lowest point for headline CPI, as past decreases in food and energy prices drop off the year-on-year figure. Core inflation (excluding volatile food and energy prices) remained unchanged at 1.2% and, in the absence of further commodity price falls, the headline CPI should start converging to that level in the coming months.
Markets are beginning to focus now on the upcoming May 7th election, whose outcome remains as uncertain as ever. Some commentators are blaming recent Sterling weakness on the possibility of a hung parliament. We are unconvinced, and believe that Sterling is still suffering from the dovish turn of the MPC at its March meeting.
Last week saw another batch of strong data releases from the Eurozone. The PMI indicators of business sentiment increased in March again. The composite index was up 0.8 to 54.1, and the increases were broad based, across countries as well as subcomponents of the index. These levels are consistent with our forecast of 2% growth in the second quarter. We also saw strong increases in consumer confidence.
Perhaps most encouraging, it seems that ECB’s easing policies are finally getting some traction in bank lending. Bank loans to households and non-financial corporates both increased strongly in February, to the highest levels since the onset of the 2012 sovereign debt crisis. It is increasingly clear that the tail winds in the Eurozone (lower Euro, cheaper oil, and ultra-loose monetary policy) are finally having the desired effect in pushing growth to a level where serious dents can be made on the unacceptably high unemployment levels.
In sharp contrast to the good news out of the Eurozone, we saw mostly weaker than expected data from the US last week. Fourth-quarter GDP was left unchanged at 2.2%, while most expected a slight upward revision. The February durable goods report was also weak, down 1.4% on the month. The one bright spot for the week was the surge in new home sales in February, up 7.8% to a new cycle high.
The tone of US macroeconomic news for the past few weeks has been undeniable weak. The key question is how much of this slowdown can be attributed to the unusually harsh winter in much of the country. To the extent that it can, we should see a bounce back in consumer and business spending once the weather improves and pent up demand is released. A key data point will be this Friday’s payroll report. If, as we expect, job creation in March continued at a strong pace, this would make us comfortable that the current slowdown is a seasonal fluke and the Fed is still on track to hike rates in June.