Calm in currency markets

Ebury, weekly currency outlook

There was little volatility last week among most currency pairs due to the absence of news from major central banks and with most investors in the US looking forward to Thanksgiving.

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Aside from the currency markets, it was an eventful week. Oil prices fell by more than 6% following news from OPEC of a lack of consensus on production cuts. Non-energy stocks and bonds rallied as a result of the oil price drop, which was perceived as a reduction in consumption and investment taxes. Major currencies traded within very narrow ranges, while emerging market currencies underperformed, helping the dollar reach new highs.

 

 

 

 

 

GBP

Two events dominated the news in the UK last week. First, the release of GDP growth figures, revised for the second time, and second, the testimony of the Monetary Policy Committee (MPC) members before the Treasury Committee. Neither event deviated from the expected pattern. Growth remained unchanged, registering a quarterly increase of 2,8%. However, the trade balance appears to be dragging down the economy, a consequence of the recent strength of the pound and the stagnation in the eurozone, which is impacting British exports.

 

On the other hand, CPM member Kristin Forbes announced that she is close to changing her vote in favor of an interest rate hike, which would reduce the current majority and leave the vote at 6-3. Under these circumstances, the pound ended the week unchanged against the euro and the dollar.

 

EUR

 

Disappointing news from the eurozone last week. Inflation fell again to 0,3%. Although the recent drop in oil prices is initially seen as positive for energy imports in the eurozone, it also appears that it could have negative consequences for inflation in the first quarter of 2015. The published employment rate seems to be holding steady at 11,5%, however, the number of unemployed increased for the second consecutive month, driven mainly by the dismal figures reported in Italy.

 

We hope that Chairman Mario Draghi will continue with his vision, which is opposed to the Bundesbank's, and implement further easing measures. Ebury will send a more detailed report as the date approaches.

 

USD

 

Mixed news from the US in a week marked by Thanksgiving. Third-quarter GDP was revised upward from the initial 3,3% to 3,9%. Half of this revision is due to an increase in inventories, and the other half to increased domestic demand. On the downside, exports of capital goods (excluding defense and transportation) remained flat in October. Housing data also remained flat. Overall, the data are consistent with our view of 3% growth over the next few quarters. The recent drop in oil prices will lead to an increase in real household income and an improvement in the trade balance.

 

As a result, we expect the Federal Reserve to continue its course of raising interest rates in 2015, as well as a continued appreciation of the dollar against other currencies.