Weekly Analysis 25.01.2016

morning briefing
Morning Users; we see a new weekly forex analysis. Come on…
Sterling fell to new lows against the euro and the dollar last week before clawing back some ground at the end of the week. GBP/EUR fell below the 1.29 mark to its lowest level since January 2015 and GBP/USD broke into the 1.40 range to trade at its lowest levels since 2009, surpassing the 2010 lows it had hit the previous week. Highlights of the last week include a more dovish ECB, an unexpected dip in the UK’s Unemployment Rate, and a third consecutive increase in US weekly Unemployment Claims. This week’s key releases include initial Q4 GDP estimates from the US and the UK. Attention will largely be on the Fed’s latest meeting results for the likely effect of recent global market volatility on the timing of any rate hikes in 2016.
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GBP – Ongoing pressures continued to weigh on the pound last week, although there were some opportunities for it to claw back some ground. The pound strengthened as UK inflation rose more than expected in December—CPI y/y was at 0.2% in December versus 0.1% in November—but weakened later that day when Bank of England Governor Carney said that it was not yet time to raise interest rates, erasing its earlier gains. On Wednesday, a drop in the Unemployment Rate to 5.1%, the lowest level since 2006, off-set slower wage growth. There were no major announcements from the UK on Thursday, and on Friday a drop in Retail Sales of 1.0% was partially offset by lower-than-forecast Public Sector Net Borrowing figures and an increase in the annual Retail Sales figure.
This week’s calendar is set to get off to a quieter start, which may make it more difficult for the pound to make any further significant gains this week. Bank of England Governor Carney is to testify on the BOE’s Financial Stability on Tuesday, which investors should watch for any implications for monetary policy. Later in the week, the UK releases its Preliminary Q4 GDP figures. Growth is expected to pick up slightly to 0.5% from Q3’s downwardly revised 0.4%. Slower-than-expected growth would likely weaken the pound again, while an acceleration in growth would instead strengthen the pound.
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EUR –  The euro strengthened further against the pound and held its strength against the dollar for most of last week, weakening on Thursday when ECB President Draghi indicated the ECB could implement further easing at its March meeting and that interest rates are likely to remain lower for longer. The ECB is also set to release forecasts through 2018 at its March meeting. Data out last week were largely underwhelming. Economic Sentiment fell again in both Germany and the Eurozone as a whole, although to a lesser degree than expected in Germany. Final y/y CPI in the Eurozone was unchanged at 0.2%. Flash Manufacturing and Services PMI figures came in lower than forecast with the exception of French Services, which rose slightly more than expected.
There are few major releases this week. The Business Climate in Germany, according to data out Monday morning, worsened more than forecast, as the index fell from 108.6 to 107.3. Attention will be on preliminary inflation figures from Spain, Germany, and the Eurozone as a whole, particularly in light of the ECB’s more dovish outlook on risks to inflation. Further low inflation figures would likely add to anticipation of further easing from the ECB in March. Other releases this week include German Retail Sales and Spain’s Unemployment Rate and Flash GDP.
USD – The dollar’s gains against the pound continued at the start of last week, despite a dip in m/m CPI. Other releases out last week were mixed. While Existing Home Sales rose more than forecast, giving the dollar some support on Friday afternoon after November’s lower figure, earlier in the week Building Permits fell (if by less than expected) and Housing Starts unexpectedly dipped as well. The Philly Fed Manufacturing Index rose more than expected but remained negative. Unemployment Claims rose for the third consecutive week, to 293K. A number under 300K is considered consistent with an improving labour market, and claims had previously been hovering near four-decade lows.
The highlight for the dollar this week will likely be the Fed meeting on Wednesday. Although the Fed is not expected to raise interest rates again this month after doing so in December, investors should look to the Fed’s comments for any guidance about the likely trajectory of rate hikes in the coming months, including the effect of recent global market volatility and a dip in m/m inflation in the US. Releases to keep an eye on include Consumer Confidence, forecast to tick up slightly, and Advance Q4 GDP, out Friday. GDP growth is expected to have slowed to 0.8% after a 2.0% gain in Q3. Weekly Unemployment Claims will also be closely watched for signs that claims may be likely to remain at higher levels.
Regards All Users.
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