Is the Euro becoming the new safe haven currency? Quite possibly as recent turmoil in the U.S. over the debt ceiling issue and government spending has put investors off the U.S. Dollar, with funds now being shifted into the Euro. Given that the U.S. will have to revisit the recent issues it has faced again in December/January time, the Eurozone with its lack of recent news looks almost stable in comparison. With the policy from Mario Draghi and Mark Carney to keep interest rates on hold for the foreseeable future giving the markets a semblance of certainty, the monthly rate decisions and news conferences have almost become non-events. The Eurozone seems to have got over the turmoil it suffered last year and while economic figures are nothing to write home about, the mood is one of calm optimism.The 16 day government shutdown has cost the U.S. economy an estimated $3.1 billion while also eroding investor confidence as a secondary effect. While this is a drop in the ocean compared to the U.S. government spending of $3.5 trillion a year, it is sure to show up in the next quarter GDP figure so expect some disappointment when this is released further down the line. With EUR/USD having touched 1.37 last Friday and currently holding firm in the mid 1.36’s a return to 1.40 could be on the cards if confidence continues to weaken in the USD and we have another debacle in debt negotiations come the new year. As one U.S. senator put it “there are only so many times we can do this without the wolf really being at the door.” A sustainable solution needs to be found rather than keeping the status quo. I would expect any movement to be gradual so you may want to think about staggered orders over the next 2-3 months to take advantage of any upward trend.
While still performing well against USD, Sterling has found itself in “no man’s land” recently against the Euro and currently looks very range bound between 1.1775-1.1850. As we have mentioned before 1.18 is still good value when looking over the course of the year so orders at this level are still very much in play. We still believe that GBP/EUR is undervalued but unfortunately Sterling is not a popular currency for investors so it tends to rely on the weakness of other currencies to sustain its movements.
Data wise this week is modest with Wednesday looking like the busiest in terms of data released. We have the Bank of England minutes out at 09.30 Wednesday morning along with the vote numbers. This should not cause much alarm, as previously mentioned most of the markets have a good idea what will be said thanks to the forward guidance policy of Mark Carney. He will be speaking on Thursday afternoon at 17.45 so if there is to be any insight gained it may come from this speech. Finally we have the UK GDP figure out on Friday morning at 09.30 which is expected to show a growth of 0.8% over the quarter and 1.5% over the year. Look for volatility around the release of this figure, it may provide opportunities on GBP crosses. The rescheduled Non-farm payrolls and unemployment rate from the U.S. is released on Tuesday at 1.30. It is hard to say how the market will react to these figures as they are normally priced in for the first week of the month so being released out of sequence as it were leaves a little to the unknown.
We expect the week to be fairly calm overall so I would not expect too much movement and majors to remain range bound but do watch out for volatility around the date releases.
If you have any questions please do get in touch.
Have a great week.
Written by David McNeill