- Draghi should emphasise vigilance but hold off on easing
- EURUSD trips 3% lower and we look for a bounce back on Thursday
- US ISM shrugs off shutdown fears pre-NFP.
The euro has started this week on the back foot following last week’s run of data that raised distinct fears of deflation in the single-currency area. Since 10am Thursday when Eurozone wide inflation and unemployment data were released EUR is down around 3% against the dollar, around 1.1% against GBP and 0.9% against the yen. The key to further losses will be whether the ECB decide that November is the month in which they should make policy more accommodative in the Eurozone.
As we said on Friday, we believe that the ECB will not break with a policy history that has persistently disappointed the market and not cut rates this week. Language within Mario Draghi’s speech should signal a cut in December and emphasise “strong vigilance” but rates will remain as they are for another month. Thursday therefore could, and should, see a rebound for the single currency although we would not expect it to last too long.
Likewise, we don’t expect the Bank of England to do anything at its meeting this week. Growth numbers have remained decent through the past month but are in no way strong enough to alter any path of improvement in unemployment markets. We may see some acknowledgement of improving trends in next week’s Quarterly Inflation Report but for now we expect the Bank of England to stand pat.
We did see a natural slowing of the rate of growth in UK manufacturing on Friday morning with October’s PMI hitting 56.0 vs. 56.4 expected. There is only so much month-on-month improvement that can be made by an industry always searching for investment and markets to sell their wares.
We are looking for UK data to cool somewhat through Q4 following such a great 3 month term between July and September, but signs from the manufacturing sector so far remain optimistic. I am particularly encouraged by the expansion in the new orders component; a strong leading indicator of future jobs growth.
The one caveat we will have to assign to UK manufacturing remains the economic area 21 miles off the coast – Europe. Recent data from the Eurozone has remained poor, and should we see another European slowdown, the UK will not be unaffected. We would expect the manufacturing sector to be the first part of the economy to show the strain as orders dry up.
The divergence in EUR’s performance against GBP and USD is courtesy of a very strong ISM number from the US on Friday afternoon. American manufacturing seems to have been relatively unaffected by the government shutdown at the beginning of October with new orders and production components looking particularly good.
The key for the USD and, Fed watchers in particular, will be Friday’s payrolls announcement. The market is only looking for an improvement of 125,000 jobs – a figure that would be the lowest since June 2012.
European manufacturing numbers are due throughout this morning with UK construction also due at 09.30.