Currency Report 10/12 Weak UK data expected but Sterling to stay strong.
 

Good morning all

UK industrial production and trade data for October are out this morning and be of some interest. These ‘hard’ data releases will provide some insight into the prospects for Q4 GDP. The market is expecting industrial output to have slowed to 0.4% m/m; however some economists see risk of a softer number.

US NFIB small business optimism and wholesale inventories released this afternoon are unlikely to trigger much market reaction. Last week we saw the USD struggle to hold on to gains despite a string of better than expected data. We believe the market has somewhat established a separation between QE ‘tapering’ and monetary policy tightening The chart shows both long- and short-dated yields were highly correlated earlier this year, both moving higher as the FOMC indicated risks of QE ‘tapering’. However, since September, moves in short- and long-dated yields have diverged. With the market has discounted the importance of ‘tapering’ and policy rates likely to remain unchanged for some time, this suggests little reason to see much USD upside.

EUR/USD has continued to edge higher. There are a number of data releases from the Eurozone this morning; however we doubt any will prompt much market reaction. Draghi’s press conference last week provided little reason to oppose the current trend. It’s unlikely there will be any new news from the Eurozone that could trigger a reversal before year-end. Most forecasters therefore would not want to oppose the current upside bias and there seems to be scope for a test of the $1.3832 year high.

The Norwegian Krone came under pressure last week after the Norges bank revealed a slightly more dovish tone at its rate meeting. The Bank reinforced its lower for longer stance, revising lower its projected rate path. The Bank now forecasts the first rate hike for end-2015, compared with end 2014/early 2015 previously. Growth and inflation forecasts were also revised lower

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