Weekly Analysis 07.12.2015

Smaller-than-expected stimulus measures from the ECB last Thursday took markets by surprise, prompting a euro rally of over three cents against both the pound and the dollar. Friday’s US jobs report, including an upwards revision to October’s already strong figure, was sufficient to keep a December Fed rate increase on the table. This week, attention will largely be on the BOE’s Thursday meeting. Other releases of note include US Retail Sales, out Friday.
GBP – Last week’s highlights included the results of the Bank of England’s Bank Stress Test and Financial Stability Report. While the institutions tested passed the stress scenarios, the BOE continued to emphasise the potential risks from global developments, particularly emerging markets. A greater-than-forecast uptick in Services PMI did little to offset earlier Sterling losses after both Manufacturing and Construction PMI figures disappointed, and was soon overshadowed by the ECB meeting.
This week’s main event is Thursday’s Bank of England meeting. The BOE is widely expected to maintain interest rates at 0.50% and to make similar comments as were made at its November meeting, including a slightly more downbeat outlook on downside pressures to inflation. There could be some market volatility if there are any unexpected changes to the interest rate votes or if the BOE takes a more or less dovish tone than at its previous meeting. Releases to keep an eye on include an expected contraction in m/m Manufacturing Production. There may be little out to offer the pound significant support this week unless the BOE takes a less-dovish tone at its meeting on Thursday.
EUR – The euro unexpectedly rallied last week as the ECB announced smaller-than-expected stimulus measures. The ECB cut the deposit rate to -0.3% from -0.2% and extended the asset purchase program (APP) by six months, through to at least March 2017. Markets had likely anticipated an expansion of the size of APP purchases and perhaps a deeper cut to the deposit rate. While ECB President Draghi described the measures as “adequate” to meet the ECB’s objectives, markets were clearly surprised. The euro jumped over 3.5 cents against both the pound and the dollar. The euro then weakened slightly on Friday as ECB President Draghi indicated that there is no limit to the policy tools the ECB might employ should they be deemed necessary, leaving open the possibility of further stimulus.
The calendar quiets down this week after last week’s surprising ECB meeting. Announcements to keep an eye on include any headlines from meetings of Eurozone Finance Ministers, who are set to discuss Greece’s progress on its economic adjustment programme, among other topics. Markets may also continue to digest Thursday’s ECB meeting and the implications for monetary policy going forward.
USD – Last week’s highlights included comments from Fed Chair Yellen and the November jobs report. Yellen indicated that the US economy is on track for a rate increase, strengthening the dollar as markets interpreted her comments as likely support for a December rate increase. Fed Chair Yellen largely reiterated those comments in her testimony before the Joint Economic Committee. FOMC Member Lockhart also made hawkish comments regarding the nearing time for a rate increase. The main event was Friday’s jobs report, which was somewhat overshadowed by the previous day’s surprising ECB meeting and euro rally. Nevertheless, a NonFarm Payrolls of 211K in November and an upwards revision to October’s figure were sufficient to keep the US on track for a likely December Fed rate increase. The Unemployment Rate held at 5.0% while Average Hourly Earnings growth slowed slightly to 0.2% from 0.4%, as expected. Other data of note included Unemployment Claims, which held near four-decade lows. ISM Manufacturing and Non-Manufacturing PMI figures both disappointed, falling more than forecast.
The dollar could recoup some of its post-ECB losses against the euro and maintain its relative strength against the pound as markets continue to anticipate a December Fed rate increase next week. Key releases this week include weekly Unemployment Claims, expected to remain near four-decade lows, and Retail Sales, forecast to increase to 0.3% from 0.1% compared to the previous month. After dropping in November according to the final figure, Consumer Sentiment is expected to increase again. In addition to anticipation of a Fed rate increase, positive data, particularly towards the end of the week, could offer the dollar some support.
Regards All.
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