Daily Market Report 18/12/2013

GBP

Not a good day for sterling yesterday as the currency weakened across the board.

Inflation figures for the UK came out below expectations dropping from 2.2% to 2.1%. Also Retail Price Index (RPI) came in below expectations at 2.6%, with the forecast figure at 2.7%.

Mark Carney also spoke yesterday in quite a negative tone. He says it could still take several years to return to strong and sustainable economic growth. He also said in addition to our domestic problems he said Britain faces weak export demand from Europe.

EUR

Inflation Figures also out from Eurozone. The annual rate rose slightly up to 0.9% from 0.8%. However, the rate is well down from the same period last year when it ran at 2.2% and also well short of the ECB target of 2%.

Also out from the Eurozone yesterday were two surveys from Germany; the ZEW current situation and economic sentiment surveys both showing large increases from the previous month. The current situation increased from 28.7 to 32.4 and the economic sentiment increased from 54.6 to 62. Both of these continue to show that Germany is really driving the Eurozone economy at the moment.

On the back of the data from the UK and Europe GBP/EUR dropped to a six week low.

USD

Again inflation figures out from America yesterday. The annual rate increased from 1% to 1.2% which is a good sign for the US economy that the figures are moving in the right direction and towards the Federal Reserve’s target of 2%. With the inflation rate improving towards the Feds target level, it could add to the pressure of tapering quantitative easing (QE), with the next decision on this due out later this evening.

Today

This morning we have already seen the pound move higher following the release of the latest unemployment figures from the UK. The UK unemployment rate has fallen further from 7.6% to 7.4%, beyond market expectations. This unemployment rate in the UK has been steadily falling for the last 6 months, getting closer to Mark Carney’s forward guidance threshold of 7%.

Under the forward guidance plan, the Bank of England will review whether to hike up interest rates once unemployment falls to the 7% threshold.

Voting from the latest minutes from the Monetary Policy Committee remained unchanged with all members voting to keep interest rates on hold and keep the monthly bond buying programme at £375bn.

There is also the Federal Reserve meeting in the USA later on this evening. This will reveal whether the Federal Reserve has decided on tapering QE. As well as this, markets will be looking for further guidance on future tapering as well. If the Fed do decide to taper but remain accommodative on future reductions of QE then this could well be US dollar negative instead of positive.

Key Announcements:

10.00am – EUR – Construction Output (Oct): Previously at -0.2%.

13.30pm – USD – Building Permits (Nov): Expected to decline to 990,000.

13.30pm – USD – Housing Starts (Nov): Expected to increase to 950,000.

19.00pm – USD – Interest Rate Decision: Expected to remain at 0.25%.

19.00pm – USD – Quantitative Easing Program: Expected to remain at US$85bn per month.

19.30pm – USD – Fed’s Monetary Policy Statement and Press Conference.