July 22, 2013

Weekly Market Analysis

Always keeping you informed for the week ahead

UK inflation rises to a 14 month high

July 21st, 2013
Welcome to your weekly market analysis email from Currencies Direct where you can stay one step ahead of your friends on the latest news and reviews of the financial markets. Our aim is to provide you with an easily digestible weekly update of how the financial market is performing using the expertise of your dealers who make it their sole aim to keep on top of the market movements.

GBP

Last week inflation figures out on Tuesday took centre stage. UK June CPI Inflation figure rose to a 14 month high at 2.9% below the 3% expectation. This started a tough session for Sterling, which weakened against both the Euro and the US dollar. Inflation has again hit the pockets of UK households with inflation stubbornly higher than average wage rises. The softer CPI data could leave Mark Carney further room for accommodative policy later in the year, especially as markets are predicting that the inflation should ease towards the end of the year. The CPI reading at 2.9% spared the incoming Governor of the Bank of England from writing a letter to the Treasury to explain why the level is so high. Last Wednesday the Bank of England’s rate-setting monetary policy committee voted unanimously to reject more QE earlier this month according to the minutes released. This was a first as this broke the regular stalemate which occurred during the last months of Sir Mervyn King’s time at the Bank. Sterling strengthened on the announcement. On other news out last week, claimant count dropped more than expected. The number of people without jobs fell by 57,000 between March and May against the previous three months, the Office for National Statistic revealed. On other reports out of the UK, retail sales grew 0.2%, which was less than expected in the month of June but on annualized basis spending growth accelerated to 2.2% from 2.1%.

EUR

Last week the Euro managed to shrug off a Fitch downgrade of the European Financial Stability Facility (EFSF) to AA+ from AAA and performed well on the back of USD weakness. The facility has previously been downgraded by Moodys and S&P reducing the impact of the move by Fitch. On other news the Euro zone’s current account surplus shrank from 23.8B to 19.6B in the month of May. It has been a quiet week for the Eurozone data and the bigget news out of Europe was the ECB’s decision to ease collateral rules. They cut the minimum rating for acceptable Asset Backed Securities to 2 A ratings from 2 AAA ratings and reduced the haircut for these assets to 10% from 16% and 22% from 26%. In doing so, the ECB is leaving more liquidity in the financial markets with the hopes that banks will lend but many remain sceptical on whether this would be effective.

USD

In prepared remarks to congress this week, Ben Bernanke raised concerns that inflation expectations have nudged lower, reinforcing the dovish tone emanating from the Fed’s last meeting. Alongside reiterating the expansive policy outlook, the main takeaway from the Fed Chairman’s time with Congress was that the Fed is in no rush to increase rates and while they intend to reduce QE, there is no set agenda for how that could happen. On the economic front, retail sales were in contrast with other better data out of the US last week coming in weaker than expected at 0.4% against the expectation of 0.8%. This rattled the USD, which lost earlier gains against the Euro and the Pound and strengthens the view that US data is still not strong enough to warrant tapering by September. Jobless claims declined for the week ended July 13th. However, continuing claims rose to 3.114 million from 3.023 million to its highest level in 5 months. Despite this we are still seeing gradual improvements in the labour market. The Philadelphia FED survey also surged from 12.5 to 19.8. The improvements in New York and Philadelphia manufacturing are consistent with the overall US recovery. Looking at the large banks results you can see signs of real recovery, with Citibank, Goldman Sachs and Morgan Stanley posting large increases in profits in the last quarter. Moody’s also raised the US’s credit outlook from negative to stable on the day when Detroit filed for the largest municipal bankruptcy in history. It will be interesting to see how the proceedings develop because several other US cities are not too far behind.

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