Currency Weekly Analysis 16.11.2015.

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Highlights last week included disappointing UK wage and US Retail Sales figures, an unexpected drop in the UK’s Unemployment Rate, and further dovish comments from ECB President Draghi. This week, look for inflation figures from the UK and the US, as well as UK Retail Sales and meeting minutes from both the ECB and the Fed. As we head into the second half of the month, investors will continue to pay close attention to both economic releases and central bank comments as December’s central bank meetings, and possible changes in monetary policy, approach.
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GBP – Sterling recovered its post-BOE losses against the euro last week, largely on the back of euro weakness, and some of its losses against the dollar. The main releases last week were the UK’s Average Earnings Index, which rose less than expected, holding steady at 3.0% growth; Claimant Count Change, which rose more than expected; and Unemployment Rate, which unexpectedly fell to 5.3%, its lowest level since 2008. After initially weakening on the back of the disappointing wage figures, the pound received some support from the unexpected drop in the Unemployment Rate. MPC Member Haldane spoke last week, indicating that given the downside risks to inflation, he does not yet see the case for an interest rate increase.
The main releases for the UK this week are Tuesday’s CPI figures and Thursday’s Retail Sales. Inflation compared to a year prior dipped to -0.1% in September, and the dip in deflation is forecast to have continued into October, with prices again down 0.1% compared to a year earlier. At its November meeting, the BOE revised down its expectations for near-term inflation and the degree to which interest rates might move by the end of 2016. Investors will also look to Tuesday’s Inflation Report Hearings for any further guidance regarding the more dovish tones the BOE took in November on the back of its concerns over low inflation. There may be little out this week to give the pound support unless the releases surprise to the upside.
eueuEUR – The euro weakened against the pound last week and remained relatively weak against the dollar. The calendar for the eurozone was fairly quiet, consisting primarily of comments from ECB President Draghi. Draghi’s comments included testimony on monetary policy, during which he reiterated that the ECB would consider expanding stimulus in December, weakening the euro. The main economic releases were Friday’s preliminary Q3 GDP figures. German GDP met expectations at 0.3%, while growth in the eurozone overall slowed from 0.4% in Q2 to 0.3%. The euro weakened slightly heading into this week’s session following the terror attacks in Paris on Friday, although the rates had largely corrected by the opening of markets in London on Monday morning.
This week’s main releases include Monday’s Final y/y CPI, which was revised up from 0.0% to 0.1%, and the latest Economic Sentiment figures. Both the German and eurozone indices are expected to improve over the previous releases but to remain relatively low. In addition, markets will eye the ECB’s October Monetary Policy Meeting Accounts, out Thursday, for any additional guidance. Investors should also keep an eye on the ongoing reaction to the attacks in Paris. Any additional geopolitical uncertainty could add to the ongoing euro weakness stemming from expectations of further stimulus from the ECB in December. ECB President Draghi will speak again on Friday morning at the Euro Finance Week.
USDaasUSD – Friday’s Retail Sales, the main release of the week, were mixed. While both the Core and overall figures improved over the previous releases, they rose less than forecast. Retail Sales were up from a downwardly revised 0.0% to 0.1% (less than the 0.3% forecast) and Core Retail Sales were up from the downwardly revised -0.4% to 0.2%. Producer Price Index figures were unexpectedly negative. Earlier in the week, Import Prices contracted more than expected, JOLTS Job Openings rose more than forecast, and Unemployment Claims held at 276K. Wednesday was a Bank Holiday. Of last week’s Fed speeches, highlights included dovish comments from Evans, who stressed the importance of gradual increases once the Fed’s begins raising interest rates, and neutral comments from Fischer, who said that it “may be appropriate” to raise interest rates at the next meeting.
The main release this week is Tuesday’s CPI figures. CPI m/m and Core CPI m/m are both forecast to tick up 0.2%, which could offer the dollar some support as the Fed looks for signs that inflation is on track to reach its 2% target rate before raising interest rates. Given the increased expectations of a December rate increase that followed the strong jobs report out earlier this month, markets would likely continue to expect a December lift-off so long as the inflation figures do not disappoint. Of course, an above-forecast would likely only increase the odds of a December lift-off. Other data to keep an eye on include the latest housing figures, including Housing Starts and Building Permits, as well as Industrial Production and weekly Unemployment Claims figures. In addition, markets will also look to the Fed’s October meeting minutes for further insight into the Fed’s expectations for the timing of a rate increase prior to the most recent jobs report. An uptick in inflation, other mixed to positive releases, and any further hawkish tones from the meeting minutes could offer the dollar some support this week.
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