Euro, British Pound to Look Past Jobs and Inflation Data as FOMC Looms Large

Key Overnight Developments

• Australian Dollar Drops as Disappointing GDP Weighs on Rates Outlook
• Euro Advances, British Pound Consolidates Ahead of Jobs, Inflation Data

Critical Levels



The Euro traded modestly higher in the overnight session, adding 0.14% against the US Dollar. The British Pound continued to consolidate at familiar levels. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights



The Australian Dollar extended losses after third-quarter Gross Domestic Product figures proved disappointing, leading the high-yielder to test below 0.90 against its US counterpart. The economy expanded 0.2% in the three months through September amid expectations for a 0.4% result and lower than the 0.6% gain recorded in the second quarter. The annual growth rate declined to 0.5%, whereas preliminary forecasts called for a slight increase to 0.7% from 0.6% in the previous period.

The details of the report also proved discouraging. Private demand proved weaker, with consumption gaining 0.7% and investment rising 0.4% versus 0.8% and 0.5% in the previous quarter, respectively. The external sector also disappointed as exports fell -2.26% while imports gained 5.78%. Meanwhile, government spending pushed higher, rising 6.2% and nearly tripling the second-quarter gain of 2.6%.

On balance, the outcome raises serious concerns about Australia’s ability to continue to outperform other top economies after the flow of stimulus cash dries up, leading traders to sharply reduce bets on further rate hikes from the Reserve Bank of Australia. Indeed, a Credit Suisse gauge of priced-in yield expectations now shows that the markets now see the probability of another 25 basis point rate increase in February at just 37% versus 80% at the beginning of the week.


Euro Session: What to Expect



The UK Claimant Count (a measure of unemployment) is expected to hold at 5.1% in November after gaining in the previous two months while the number of new Jobless Claims gains 12,500, the smallest increase since April 2008. While this is somewhat encouraging, it is certainly not the kind of blockbuster improvement that is likely to offer Sterling lasting support in the days ahead. Indeed, 5.1% represents the highest reading in 12 years while disappointing outcomes in November’s PMI and economic confidence figures suggest firms are far from cheery, meaning a robust rebound in employment is hardly imminent. The outcome’s implications for monetary policy are also fairly limited, with the Bank of England likely to remain in wait-and-see mode until November’s expansion of its quantitative easing program is completed in February.

Turning to the continent, November’s final Euro Zone Consumer Price Index outcome is expected to confirm flash estimates that showed the annual pace of inflation gained for the first time in seven months, adding 0.6%. A return to positive (if modest) price growth is welcomed news for the European Central Bank, suggesting the currency bloc may be able to avoid a debilitating period of deflation without implementing additional monetary stimulus measures. Crafting a single monetary policy that accommodates the relatively better-off economies of Germany and France as well as laggards like Italy and Spain is a tough proposition, and the ECB will certainly appreciate any opportunity to remain on the sidelines. The re-emergence of inflation presents a new set of problems for the central bank in the long term, however, considering that lending continues to contract despite record-low borrowing costs. Indeed, loans to the private sector shrank -0.8% in October, the worst reading since records began in 1998. This argues for a loose monetary policy, while accelerating CPI calls for just the opposite. Opting to contain price growth in this case threatens to stifle economic recovery before it begins in earnest, while the alternative risks losing a grip on inflationary pressure. How the ECB will manage this delicate balance remains to be seen.

On balance, neither of today’s headline European releases are likely to have much of a near-term impact currency markets, with traders looking ahead to the outcome of tomorrow’s policy announcement from the US Federal Reserve’s rate-setting committee (FOMC) seeking some validation that recent improvements in Nonfarm Payrolls and Retail Sales will translate into an accelerated move towards higher borrowing costs.


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