Another Low In Euro Ahead Of U.S. Data And Carney Speech

This week’s trend of euro and dollar moves really dictating the state of play in the markets looks set to continue again this morning in the absence of any important scheduled events or data releases.

This afternoon, shortly before the US open, we’ll get the latest US retail sales figures which investors always pay close attention to due to the importance of the consumer to the economy. We’ll also hear from Bank of England Governor Mark Carney as he speaks at the Advanced Manufacturing Research Centre in Sheffield.

Carney described the idea of an interest rate cut to combat oil driven disinflation as “foolish” at the House of Lords earlier this week. The central bank is clearly still focused more on the timing of the first hike rather than worrying about potential deflation and I expect more of the same rhetoric from him later today.

One thing that is delaying the first hike and could even delay it beyond the end of the year is wage growth, which even Ian McCafferty – one of the most hawkish members of the MPC – admitted could be held down by long-term low inflation. If that is a view shared by the Monetary Policy Committee then rates could well remain low for much longer than the markets are currently expecting. This could be one of the key things that Carney is pressed on today which, if perceived as dovish, could weigh on the pound.

The rest of the day is likely to be fairly quiet, allowing traders more opportunity to reflect on the upcoming rate hike from the Federal Reserve and the impact of the ECBs public sector purchase program (its version of quantitative easing). So far that has led to an enormous amount of weakness in the EUR/USD pair, with it temporarily breaking below 1.05 in the early hours of this morning, the first time it’s done so since January 2003. The pair looks to be stabilising, although the mere fact that it made new lows this morning and isn’t showing signs of momentum loss suggests to me that bias is going to remain to the downside.

This is partly driven by the weakness that normally comes with central bank stimulus but may have been exacerbated by the capital outflows in the Eurozone as investors turn their back on negative returns on bonds and go in search of real yield. I would say this is more responsible for the persistent euro weakness than anything else right now. This is the problem with starting a massive bond buying program at a time when yields were already at or near all-time lows. How much lower can they actually go?

The FTSE 100 is expected to open 19 points higher, the CAC 40 9 points higher and the DAX 45 points higher.

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