Currency Monthly Analysis November 2015.

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October was an eventful month, particularly for the euro.
An unexpectedly dovish ECB weakened the euro against both the pound and the dollar, reversing gains the euro had made following August’s global market volatility. As October drew to a close, that post-ECB euro weakness, combined with end-of-month profit taking, enabled Sterling-euro to return to its highest levels (above the 1.40 psychological barrier) and euro-dollar to its lowest levels since the end of August. The US dollar benefited towards the end of the month from a more-hawkish Fed, which fuelled expectations of a possible December rate increase, although the Fed’s decision will rely on the global developments and data out in the interim. Central banks in general will remain in focus in November as the end of the year nears, bringing with it the question of whether to begin normalising monetary policy or to maintain or expand easing. Inflation will remain a key topic following recent dips into deflation in the US, UK, and the eurozone and the potential ramifications of ongoing low inflation on monetary policy decisions.
pounds Gbp
GDP growth in Q3 slowed from a final 0.7% in Q2 to 0.5%, slightly under forecasts of 0.6% and in line with the NIESR GDP estimate. Manufacturing and Industrial Production were both better than expected in September. As in the eurozone and US, inflation turned negative in September in the UK. Average Earnings rose 3.0%, up from previously if slightly under forecast, and while Claimant Count Change unexpectedly rose, the UK’s Unemployment Rate fell to 5.4%, strengthening Sterling. Retail Sales rose significantly more than expected from August to September, up 1.9% on the inclusion of the August Bank Holiday and the Rugby World Cup, and provided the pound with another opportunity to strengthen.
This month, attention will largely be on the Bank of England, which release its Bank Rate decision, Monetary Policy Statement, and quarterly Inflation Report on Thursday the 5th. BOE Governor Carney will hold a press conference following the releases. The pound may strengthen if the BOE maintains its current expectations, while any downward revisions to its economic growth and near-term inflation projections could weaken the pound. Governor Carney has previously said that the timing of a rate increase will become clearer around the turning point of the year, that the BOE is not dependent on the Fed’s moving first, and that a rate increase is not necessarily a guarantee. Thus, the BOE will remain in focus for the rest of the year. As for November’s economic releases, following September’s strong Retail Sales figure, markets will be particularly interested in the second estimate of Q3 GDP to see if the uptick has been fully captured. Investors will also watch for confirmation that the UK’s dip into deflation was temporary. Any further upticks in Average Earnings or downticks in Claimant Count Change or the Unemployment Rate could provide opportunities for the pound to strengthen.
euas Eur
After initially maintaining its strength against both the pound and the dollar, the euro weakened towards the end of the month when the European Central Bank took a more dovish tone than markets had expected. After final CPI figures confirmed a dip into deflation in September, markets had speculated that low inflation might move the ECB to expand Quantitative Easing in the future. ECB President Draghi surprised markets by stating that the ECB would review the scope of the stimulus it provides at its December meeting, with options for further stimulus including an extension of the asset buy-back programme and a cut in the deposit rate, currently at -0.2%. He later cautioned that it was still too early to tell whether such a move would be necessary. Economic Sentiment continued to drop in both Germany and the eurozone, while German Factory Orders unexpectedly contracted. According to preliminary figures, CPI remained negative in October in Spain, but not in Germany, and y/y CPI in the eurozone unexpectedly ticked up to 1.0%. The Unemployment Rate for the eurozone dipped to 10.8%. Spain’s Unemployment Rate dipped to 21.2% and Services and Manufacturing figures from France, Germany, and the eurozone largely improved over forecasts with the exception of German Manufacturing, which disappointed.
Euro weakness may continue in November although there remain opportunities for the euro to recover some lost ground. As the ECB decides whether to increase stimulus in December, markets will continue to pay close attention to the eurozone’s economic releases, particularly inflation figures. Any upticks in inflation, manufacturing, or GDP figures could offer the euro some support. The European Commission will release its Economic Forecasts for EU member states, which markets will eye for any forward guidance.
USDaas Usd
October started off with a disappointing September jobs report as August’s Non-Farm Payrolls figure was unusually revised down. Average Hourly Earnings also came in below expectations, holding steady when compared to the previous month. The Unemployment Rate held at 5.1%. Other data out in October were mixed as well. Consumer Sentiment rose but Consumer Confidence dipped. Core inflation ticked up, but m/m CPI fell 0.2%. Both the Philly Fed and Empire State Manufacturing indices fell more than expected, and Factory Orders contracted 1.7%. One highlight last month was weekly Unemployment Claims, which came in under forecast four consecutive weeks, returning the four-week average to its lowest levels since 1973. One of the main boosts for the dollar was a more-hawkish Fed statement following the Fed’s October meeting. Specifically, the statement said the Fed would consider whether to raise rates at its next meeting, and omitted a reference to the downside risks of global developments on economic activity. Markets speculated that a December rate increase might be more likely as a result, although FOMC Member Williams cautioned at the end of the month that the change in language was not a guarantee of move on rates, only a forewarning in case the Fed decides to act in December.
Over the coming month, markets will continue to look for signals that the Fed may raise interest rates in December. October’s employment data will be closely watched after last month’s disappointing figures for signs that the labour market remains on track. Following last month’s dip in m/m CPI, markets will also look to see if inflation ticks up and if there are any further gains in Core CPI, as risks to inflation are one factor in the Fed’s deliberations over the timing of monetary policy normalisation. The Fed’s meeting minutes may provide some guidance on the Fed’s expectations, and any further hawkish tones could again strengthen the dollar. With no Fed meeting this month, dollar strength will be highly data dependent as markets interpret each release’s possible implications for the timing of interest rate normalisation. The Fed will release its updated economic projections in December.
Regards All.

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