FX Markets Continue to go Nowhere

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Market Drivers for February 26, 2014

ECB source – no consensus on March policy move

UK GDP in line

Nikkei -.54% Europe -.11%

Oil $102/bbl

Gold $1341/oz.

Europe and Asia:

AU Construction work -1.0% vs. 0.2%

EUR GFK Consumer confidence 8.5 vs. 8.2

UK 2nd reading Q4 GDP 0.7% as eyed

North America:

USD New Home Sales 10:00 AM

For the second night in a row this week currency markets remained stationary with majors essentially treading water as traders awaited fresh news and policy moves before making any further directional bets. In the EZ sources at the ECB noted that the there was still no consensus on any interest cut at next week’s governing council meeting.

ECB policymakers are clearly reluctant to cut rates further and are even more averse to turning the benchmark rates negative, believing that such a move could send a “problematic” signal to the market. However, inflationary measures remain depressingly low and are not expected to rise anytime soon.

For now Germany continues to carry all of the EZ economy on its back as it is the only member of the union to demonstrate solid growth this year. Today’s German GFK consumer sentiment data which rose to 8.5 from 8.2 expected confirmed that sentiment in Europe’s largest economy remains robust and is likely to support better spending going forward.

However as we noted many times in the past, the dichotomy between Germany and the rest of the EZ is unsustainable and unless the periphery sees some pick up in growth the ECB will be forced to act sooner rather than later. For now the policymakers are clearly playing for time, hoping that demand will recover as the year progresses, but unless there is some tangible improvement in economic activity some sort of a rate cut is inevitable if not at this meeting then the one in April.

Elsewhere in UK the 2nd revision of Q4 GDP printed basically in line with expectations at 0.7% on quarter over quarter by slightly lower at 2.7% on year over year versus 2.8% eyed. Manufacturing, services and household spending were all key contributors to the increase indicating that growth is broad based and evenly distributed. However BOE officials continued to dampen any expectations of rate hikes and noted that even when the tightening cycle begins the increase are likely to be smaller than the historical norms.

Cable saw very little reaction to the news and remained just below the 1.6700 barrier in morning London dealing. Overall, with the exception of the Aussie which came under some stop driven selling early in Asia, the rest of the majors have been trapped in 30 point ranges for most of the night and low volatility may continue into North American trade as US only has New Home sales report on the docket which may be skewed by the adverse weather conditions last month.

Boris Schlossberg
Managing Director

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