Weekly outlook

Last week in review

Main theme driving the market.

It was another week in which Greece fell short of meeting terms attached to its next bailout; which still remains out of reach for the moment. However, progression towards a deal was enough to keep the euro and other closely-linked risk assets supported. The pound edged higher, predominantly against the US dollar, after the Bank of England’s inflation report was less dovish than what investors had expected, while data on UK retail sales outstripped forecasts. The US dollar suffered towards the end of the week after US jobless claims fell close to 4-year lows, sending stock markets soaring and demand for safe havens lower. Robust local employment data helped the Australian dollar to new highs. However, its fellow commodity-linked currency, the Swedish Krona, lost its appeal somewhat after Sweden’s Riksbank cut interest rates. The yen was the week’s biggest loser, dropping to 3½-month lows against its US counterpart after the Bank of Japan unexpectedly increased measures aimed at weakening its currency.

Sterling (GBP):

Sterling rose back towards more familiar trading levels against the euro and US dollar after the Bank of England’s quarterly inflation report eased speculation more bond purchases were on the horizon. The BoE upped its inflation forecast for the next two years whilst offering a slightly more optimistic feeling towards growth prospects. Nationwide consumer confidence data and UK retail sales figures both surpassed expectations by an encouraging margin. Furthermore, unemployment figures hinted the recent deterioration in Britain’s labour market could be slowing.

US Dollar (USD):

A number of above-forecast US economic reports eased global growth worries, sending stock markets soaring to their best levels since the financial crisis and, as you might expect, reducing demand for the safer US dollar. Though updates on retail sales and industrial production were uninspiring, manufacturing surveys for both the New York and Philadelphia regions rose sharply. Several indicators on the health of the US housing market were solid while weekly jobless claims fell close to 4-year lows.

Euro (EUR):

On the whole, sentiment towards the euro ebbed as frictions between Greece and its European counterparts began to make headlines. Politicians in Athens failed to clearly outline the extra spending cuts demanded by its creditors while suspicions grew that Greece would seek to renegotiate any bailout subsequent to elections in April. After eurozone officials cancelled a meeting with Greece mid-week, the euro fell on concerns Europe was now seriously considering withdrawing its loan offer of €130b.

Japanese Yen (JPY):

The yen fell broadly, hitting its lowest level since October last year against the US dollar in spite of a generally more cautious tone in markets which tends to favour the safer Japanese currency. The Bank of Japan reacted to a rapid deterioration of economic conditions, headlined by recent fourth quarter growth data which fell into negative territory. Following its monetary policy meeting at the beginning of the week, the BoJ surprisingly expanded its asset buying program from 55- to 65-trillion yen in an attempt to place downward pressure on its currency unit which continues to suffocate export growth. Policy makers also went one step further by setting a 1% inflation target, opening up the possibility of more currency-weakening intervention as deflationary risks persist.

Recent key releases:

Indicator Actual Forecast Previous
GB January RICS House Price Survey -16 -17 -16
GB January CPI % (y/y) 3.6 3.6 4.2
DE February ZEW Economic Sentiment Index 5.4 -12.0 -21.6
EZ December Industrial Production % (m/m) -1.1 -1.2 0.0
US January Retail Sales % (m/m) 0.4 0.7 0.0
DE Q4 Flash GDP % (q/q) -0.2 -0.3 0.6
EZ Q4 Flash GDP % (q/q) -0.3 -0.3 0.3
GB January Claimant Count k 6.9 3.0 1.9
GB December ILO Unemployment % 8.4 8.5 8.4
US February Empire State Survey 19.53 15.0 13.48
US January Industrial Production % (m/m) 0.0 0.7 1.0
US January Building Permits k 676 680 671
US Philadelphia Fed Survey 10.2 9.5 7.3
GB January Retail Sales % (m/m) 0.9 -0.4 0.6
US January CPI % (m/m) 0.2 0.3 0.0

Highlights for this week

Sterling (GBP):

  • Investors will study public borrowing figures on Tuesday for signs the government is still on track to achieve its fiscal goals this year. If numbers slip, and Wednesday’s minutes from the BoE’s February monetary policy meeting put additional quantitative easing worries back on the table, the pound’s popularity may quickly drop off. Markets will also be on guard in front of Friday’s revision’s to initial fourth quarter UK GDP data.

US Dollar (USD):

  • A market holiday on Monday will offer a quiet start from North America although trade should be dictated by events in Europe where a meeting between officials could see Greece handed its next bailout. In the event of Athens avoiding a potentially catastrophic default, investors will more than likely pile back into risk assets and sell the dollar to fund carry trade activity.

Euro (EUR):

  • The euro’s demise has been limited somewhat on anticipation another meeting between leaders on Monday will offer steps forward on a deal to save the Greek economy. That feeling was boosted last week after it appeared the European Central Bank had already begun work on its portfolio of Greek bonds ahead of a potential agreement. Despite a week packed full of top tier data, particularly from the German economy, the euro should again find direction from endless Greek debt negotiations. As soon as markets receive confirmation Athens has done enough to warrant more emergency cash, the euro will almost certainly enjoy a relief rally.

Japanese Yen (JPY):

  • There are very few events on the local calendar leaving the yen open to track broader market sentiment which is likely to again be dominated by talk surrounding Greece. As long as the possibility of a Greek default looms, the yen’s decline may well be limited as traders should be less willing to unwind defensive positions. However, it seems investors already feel they may have taken the yen as far as they can and the BoJ’s decision to loosen monetary policy even more, served as a wake up call, justifying concerns from officials in Tokyo the yen has long been overvalued.

Upcoming key releases

Date Indicator Forecast Previous
20.02 GB February Rightmove House Price Index n/f 0.4
21.02 GB January Public Borrowing £b n/f 13.7
22.02 DE February Flash Manufacturing PMI n/f 51.0
22.02 DE February Flash Services PMI n/f 53.7
22.02 EZ February Flash Manufacturing PMI n/f 48.8
22.02 EZ February Flash Services PMI n/f 50.4
22.02 US January Existing Home Sales K 46.1
23.02 DE February IFO Business Climate Index n/f 108.3
23.02 GB January BBA Mortgage Approvals k n/f 36.171
23.02 GB February CBI Industrial Trends Survey n/f -16
24.02 GB Q4 Revised GDP % (y/y)