Is it time for the ECB to bring out the big guns? Well, nothing else is working. I think it will be a matter of time before the floodgates are opened and in washes quantitative easing. Will it be this year? I very much doubt it with Germany and some other northern European countries having strong reservations that QE is the solution. However, the fact that things are going from bad to worse in the Eurozone will mean Draghi is left without many other options. Indeed, in a statement regarding the latest growth forecasts the European commission stated “GDP growth struggled to gather momentum, leaving the recovery not only subdued but also fragile”. Fragile is an understatement. Growth forecasts for 2014 have been revised down from 1.7% to 1.1%. Unemployment in the southern European economies like Greece and Spain are above 20%. Anyone see that figure improving much next year? France/Italy/Portugal are likely to remain in double figures too. The ECB next month releases its own GDP and inflation figures. These will be, in a word, dire. So, these figures will put the final nail in the coffin with the only saviour likely to be an injection of QE. It worked for the US. Can it work for the Eurozone?
On the back of the doom and gloom the EUR fell further against the US Dollar last week. I would expect EUR/USD to continue steadily lower. Of course, there will be occasional intraday spikes and bouts of dollar weakness so we may see a short lived bounce on EUR/USD back above 1.25 but I wouldn’t expect us to stay up there long. I maintain my view that EUR/USD will get progressively worse. I called EUR/USD below 1.25 and my forecasts for the year have proven to be correct. I expect EUR/USD to finish the year around 1.23 and into Q1 next year we’ll break the 1.20 support level to the downside then I expect 1.15 end of Q1 for EUR/USD. Too aggressive a call? We’ll see. If you are a buyer of USD look to either buy on Spot or place market orders and look to relief rallies on EUR/USD to take advantage of any spikes in the market. Contact me to discuss your options and levels to aim for.
What direction is GBP/USD likely to go in? I’ve maintained my view for the whole year so I’m not going to change now. GBP/USD will fall further still although I do think we’re approaching the end of the sustained shift lower and dollar strength in Cable. I said we’ll end up around 1.57 prior to Christmas and I don’t see much evidence to suggest a significant change in direction. We’ll drift lower rather than move with any real purpose. If you are a USD buyer then it may be worthwhile considering the purchase of USD on Spot. Alternatively, if you are of the view that the move is overdone on cable and we’ll start to see a retracement higher then contact myself or one of the trading team and we can implement a market order for you. I would suggest however that a move higher short-term is unlikely. Need to purchase USD prior to the festive break? Please get in touch and we’ll secure those for you. One less thing to worry about in December!
GBP/EUR? I think we will have one more final push higher prior to the end of the year. 1.28 the figure seems the key level to break. If we can have a sustained break higher and sit above this level for a while then I see a break through 1.30 a possibility. This will occur in Q1 ’15. Should you have a requirement to purchase EUR before the end of the year I would look to execute on Spot or place an order in the market. You don’t need to look too far back when we were consistently in the 1.15-1.18 range and 1.18 was considered a very good rate of exchange. Yes, we would all like it to go to 1.30. Looking at recent history I think some perspective is needed sometimes in that the rate of exchange at the moment is favourable. I would hazard a guess many of you are well above costed levels that were set at the beginning of the year. Covering off and mitigating risk is the name of the game. If you have a requirement and would like to discuss the options available to you please email me.
What data do we have out for the remainder of the week? Not too much is the answer. We had the Bank of England Quarterly Inflation report released yesterday that provided some volatility to Sterling crosses. Indeed, after Mark Carney spoke Sterling came off. GBP/USD and GBP/EUR moved further to the downside. Apart from that, there isn’t much on the cards until Friday. First up is Germany with the release of the GDP Figure (YoY) (Q3) followed by the GDP figure released from the Eurozone as a whole (YoY) (Q3). Should these disappoint to the downside then expect further pressure on the single currency. We head across the pond early afternoon UK time as we have Retail Sales (MoM) October released from the US followed by Reuters/Michigan Consumer Sentiment survey. Retail sales become more important as the festive season approaches. I expect the Retail Sales figure to come in above consensus giving the dollar a further boost.
Predictions for remainder of the week –
GBP/USD – Broadly stable with it moving slightly lower with it being fairly range bound until next week
EUR/USD – Lower towards the end of the week after its relief rally the past few days
GBP/EUR – After coming off yesterday I would expect it to push slightly higher today and tomorrow.
Please contact myself or one of the trading team to discuss implementing market orders or executing any transactions that you may have.
Any questions please let me know.
Enjoy the rest of the week.
Written by Liam Alexander