Funding Demands Keep EUR Under Pressure Against British Pound
- Written by: Will Peters
-
Pound Rate Today: Sterling (GBP) conversion rates have fallen in the wake of news that the Bank of England remains cautious on the UK economy's outlook.
The GBP has found support as we close out the week on the back of on-target GDP data from the ONS. The UK economy has grown 3% year-on-year in the 3rd quarter; outpacing its US and Eurozone rivals.
Currency markets had however expressed disappointment mid-week when the Bank of England's Monetary Policy Committee (MPC) struck a cautious tone towards raising interest rates - until markets get a sign rates are going to raise earlier than currently priced in we may struggle to see the GBP rally.
The GBP is looking mixed at the time of writing:
- The pound to euro conversion: The GBP/EUR exchange rate fell 0.19 pct to reach 1.2646 following the minutes. On Friday it is at 1.2687 confirming a slight recovery.
- The pound to dollar conversion: The GBP/USD exchange rate fell 0.40 pct to reach 1.6052. Currently @ 1.6080.
- The pound to Australian dollar conversion: The GBP/AUD exchange rate fell 0.60 pct to reach 1.8252. Currently @ 1.8255.
- The pound to Canadian dollar conversion: The GBP/CAD exchange rate fell 0.36 pct to reach 1.8020. Currently @ 1.8052.
PS: The above are spot market quotes; your bank will affix a spread at their own discretion. An independent FX provider will guarantee to undercut your bank's rates, in some instances they are able to deliver up to 5% more currency. Please learn more.
On the economic front the UK GDP figures printed at 0.7% as expected and cable staged a mild relief rally as some traders feared that the recent slowdown in activity could translate into lower growth figures. The preliminary data showed that production rose by 0.5% versus 0.2% the period prior but services slowed to 0.7% from 1.1%.
The slowdown in activity reflects the tepid demand conditions in EZ as whole, but on that front there was some positive news as GFK Consumer data out of Germany showed an uptick rising to 8.5 from 8.1 expected. The latest data from Europe indicates that conditions have stabilized and may actually improve into the year end as the shock of geopolitical tensions with Russia begins to wane.
For now however there is nothing in the UK data to indicate that BOE is about to shift its policy stance and that means that cable will remain rangebound for the time being. The pair traded to a high of 1.6070 in the wake of the announcement but then retraced back to 1.6030 as it continues to consolidate above the 1,6000 figure.
Why the Euro Will Stay Under Pressure
PMIs from France were weaker than expected, slipping further in to contractionary territory in October. However, the German numbers were surprisingly strong with the manufacturing index rebounding firmly after falling below 50 in September.
This helped provide some support for EUR/USD; however, market moves were marginal.
There is little on the calendar today that looks likely to trigger much market reaction. With Eurozone aggregate PMIs coming in firmer than expected, this should somewhat temper market concerns about weaker Eurozone growth.
"However, with EUR still being viewed as a funding currency, a continuation of improving risk sentiment will likely weigh on EUR/USD. Furthermore, the market will likely have an eye on Sunday’s release of the AQR and stress tests results. Uncertainty surrounding the results and the likely market reaction will limit attraction towards EUR," say Lloyds Bank Research in a note to clients.
BoE vote 7-2 to hold as expected, more dovish tone
The BoE voted 7-2 to leave interest rates and QE on hold at their October meeting it was revealed today.
The vote is unchanged from last month (with Weale and McCafferty remaining the dissenters) and in line with expectations.
"As anticipated, the broader tone of the meeting was also more dovish, consistent with the market having pushed back expectations for BoE rate rises between the September and October meetings," comments Nick Bate at Bank of America Merrill Lynch Global Research.
The BoE noted a slightly softer tone to domestic data of late - for example, in the housing and export sectors - with most members also judging that inflationary pressures from both the labour market and underlying CPI data were sufficiently muted (the BoE had access to the weaker-than-expected September CPI data at the time of their meeting).
The minutes also reported that "pessimism about the global economic outlook had increased over the month", reflecting the issues in the Middle East, ongoing tensions between Russia and Ukraine, and, most pertinently, softer signs from the Euro area.
The latter, therefore, continued to pose headwinds to a stronger UK recovery and, within that, a rebalancing to more export-led UK growth.
But are the Declines in the Pound Exchange Rate Overdone?
The pound has fallen across the board following the release of the BoE Minutes, "but we believe that this move is an exaggeration," says Bate.
The market has already aggressively re-priced its outlook on the Bank of England, pushing its rate hike expectations into Q3 2015.
Though dovish, the recent run of softer UK macro data, combined with dovish rhetoric from a number of MPC speakers, was already pushing the market into expecting a more downbeat assessment, not only of UK economic growth prospects, but also those in the global economy.
"As a result, the Minutes have done little to alter our near-term view on GBP and we would expect sterling to reverse some its immediate post-release losses," forecasts Bate.
Bank of America are backing the pound euro exchange rate largely on the observation that the fundamental backdrop for
the pound remains a strong one and this is likely to confirmed later this week, with the release of Q3 GDP (BAML: 0.7%q/q).
The UK looks set to continue to grow at the strongest pace in G7 this year, despite some softness in the data.
"Furthermore, though the UK rates market has pushed out its expectations for UK rate hikes, the policy divergences between the pound and its European counterparts is set to widen further in the coming months, with corporate bond purchases potentially the next asset class on the ECB radar screen," says Bate.
Magnitude of Market Rally Catches Some by Surprise, Apple, Yahoo! Lead
Looking at the markets today, the FTSE 100 is down 25 points, pushed lower by concerns from the consumer sector.
Commenting on recent financial market action is Chris Beauchamp at IG.com:
"The magnitude of yesterday’s rally will have caught many by surprise, and while markets are moving a touch lower this morning it seems like the bulls are still firmly in control. The 10% correction was a nasty shock, but with the end of the year looming there will be a lot of investors looking to jump on board a late-stage rally that will do much to buff performance figures for the year.
"British American Tobacco’s disappointing numbers today have sent the shares to their lowest level since April, although the strong pound’s impact will diminish in the next update given that sterling is continuing to fall.
"Speaking of sterling, the currency was given another shove in the direction of $1.60 as minutes from the BoE pointed towards a delay in interest rate hikes. This backs up the public statements made last week at the height of the market’s volatile period, but it illustrates how the attempt at clear forward guidance simply leaves the bank at the mercy of events.
"Yahoo picked up the baton from Apple last night, keeping markets in positive mood thanks to good earnings numbers, but the big event is likely to be the CPI reading.
"Downward pressure on the number is likely to come from the broad selloff in oil prices, which gives the Fed additional wiggle room on monetary policy, even if QE is still set to leave us next week.
"More important is the outlook on rates and in this the FOMC is likely to emulate the BoE in due course, signalling that renewed global headwinds will be the key worry regarding the outlook for the US economy. Ahead of the open, we expect the Dow to start 30 points lower at 16,586."