The larger picture of increased currency volatility continued yesterday as EUR/USD carved out fresh 12 year lows and GBP/EUR ran higher before collapsing later in the session.
There is very little preventing further euro losses at the moment. Nobody wants to stand in the way of this freight train quite yet and markets seem happy to target parity in EUR/USD and negative rates on German ten-year debt. Hitting those marks would no longer be a surprise to anyone; it could happen as soon as next week.
We noted yesterday that while this slumping euro is great for the European economy – hopefully waving off the scourge of deflation and increasing export-led growth – the near-term effects on the UK and US economies are a lot less beneficial.
This point was echoed by MPC member Martin Weale yesterday. In a speech to business yesterday, Weale was wary of the impact that a strong pound could have on inflation. Weale warned of a ‘shock’ to inflation as a result of sterling’s performance against our single largest trading partner.
I think this comment is important because Martin Weale is one of the most hawkish members of the Monetary Policy Committee, having spent part of 2014 voting for interest rate hikes, yet he sees a problem with doing that moving forward. Next Wednesday we receive the latest round of minutes from the Bank of England and I would be gobsmacked if there were no additional comment to Weale’s about sterling strength.
GBP was taken below the 1.50 level yesterday through the session and looks ready to sniff out the lows of the year below that.
We saw further indications overnight that the world economy is in the midst of a currency war. Korea’s central bank has thrown its hat into the rate cut ring by cutting interest rates to their lowest level on record. The Governor of the Bank of Korea called the move ‘pre-emptive’. I would call the move ‘panicked’ given the policy and currency moves that we have seen from regional manufacturing competitors such as Japan and Thailand.
Although the data calendar picks up today, there is little time for structured economic news when markets are attempting to dismantle a currency by the end of the quarter. That being said I am looking for additional US Dollar strength to emerge, thanks to the latest retail sales numbers due this afternoon.
There is no reason why the USD drive higher should end today.
