Last week has largely been a Euro story. The common currency has enjoyed strong interest following last week’s European Central Bank’s (ECB) decision not to ease. EUR$ in particular performed well. This week saw the pair achieve its strongest value since October 2011 in the 1.3900 handle and has reignited chatter about 1.4000. In the last 5 weeks this pair has rallied almost 5 big-figures off of lows in the upper 1.3400 area in early February.
While recent Euro strength can’t be denied, looking forward the risks to its current valuations are high. One story that looks to be percolating on the sidelines is resurgent strength in the American economy. Extreme winter weather was an economic setback to data released in the December to February period, however as spring takes hold, figures out of the USA have been encouraging. Renewed interest in the Unites States at a time when the Eurozone is forecast to be limping through a ‘prolonged period’ of low inflation and anemic growth could clip EUR$’s wings.
The week’s Euro strength has also weighed on the GBPEUR, which tumbled to 3-month lows below 1.2000. Off of charts the pair has broken through trend support that goes back 8-months to July 2013. While the longer term macro-economic landscape still favors the Sterling, this week’s bearish technical event could signal a resetting of expectations for the pair going forwards.
The Pound also underperformed the Greenback this week, with Cable pulling back almost 200 pips from last week’s highs. As the week draws to a close, the pair is hovering near its monthly low in the 1.6600 area. Sentiment has turned against the British unit this week following Tuesday’s Inflation Report hearings, during which elected officials probed the Bank of England (BoE) on its forward guidance, reports of FX rate rigging, and economic expectations. This week’s activity doesn’t look to have changed the broader outlook for the Sterling, rather it spears to be a bit of a time out for the unit.
Wednesday is the highlight of what would otherwise be a fairly average looking calendar next week as far as events and data are concerned. In what could be a volatile day, Wednesday sees the release of UK employment statistics during the London session and a special ‘Fed Day’ in the USA. Though not as important as it was a couple of months ago when the BoE’s Forward Guidance was tied to it, Wednesday’s UK employment statistics will be hotly anticipated.
Last month unemployment in the UK edged higher for the first time since April 2013 to 7.2%. According to the Reuters consensus forecast, expectations are that data will reveal joblessness in the UK has resumed its downtrend in the month of February, moving lower to 7.1%. Regardless of interest rates being officially de-linked from unemployment, the state of the labor sector is an important indicator of overall economic health, and hence meaningful to currency markets.
The Fed meets and makes policy announcements 8 times per year. On 4 of those occasions the good people of the US Federal Reserve give us a little something extra in the form of their Economic Projections. Next week is such an occasion. The Economic Projections, as the name suggests, provide markets with insight into the inflation & GDP growth expectations of the Fed, and thus the benchmark by which they base their policy decisions. Also, and arguably equally important, the Economic Projections publish individual member’s interest rate forecasts. Markets tend to react quickly and strongly to any major shift in interest rate expectations. So the potential for elevated volatility surrounding this event is high.
As far as policy changes are concerned, another measured cut of the Fed’s massive quantitative easing program is expected given that economic data in the last month hasn’t turned materially worse. In fact just the opposite, Durable Goods, New Home Sales, and PMI data have printed better than expected. As well, the most recent employment data out of the US was encouraging and Retail Sales growth as well as CPI were on expectations.
Further reading: Crimean Referendum threatens Europe’s Economic Balance
