What a week for the USD. Powering ahead without any compunction for the rest. I have been saying it in just about EVERY BLOG we have written that the USD is unstoppable as the FED and ECB both (in their own ways) add fuel to the USD’s fire. The numbers don’t lie. The rhetoric cannot be disputed. The trend cannot be broken. The USD is fast becoming the place to park your cash.
ECB once again disappointed last week. The US employment numbers on the other hand surprises positively. The USD attacked the strong employment number with vigor moving from (EURUSD) 1.2620 to 1.2520 and (GBPUSD) 1.6117 to 1.5985. This is a significant step taken towards our TARGET for EURUSD at 1.2000 for 31st December. I know I have said that many times, and I will continue to write it until it has been reached. And we still have the best part of 3 months to go.
So, after last week’s disappointing ECB meeting, where the Draghi provided little detail on the current QE program or potential expansion, the market will look for further colour in his speech on “the latest developments in Europe and in central banking” in Washington on Thursday. The ECB will have to extend its asset purchase program into European Gov. Bond’s by Q1 2015 to return inflation back to the close to 2% target over the medium term and to keep medium-term inflation expectations well anchored. This will in itself add support to the strong USD and reinforce Draghi’s call for a continued weaker EUR. There can be little debate about the merits of a weaker EUR, as it supports EU manufacturing and ultimately EU growth. Why fight a losing a losing battle. Let the EUR decline and with it strengthen the balance sheets of companies that ultimately need a weaker EUR.
The Reserve Bank of Australia rate decision (Tuesday) is widely expected to leave its policy rate unchanged at 2.5%, but there is a growing risk it may drop its forward guidance of a period of rate stability given recent declines in the AUD.
The Bank of England is to meet on Thursday and is widely expected to leave the Bank Rate unchanged at 0.50% and therefore issue no statement. We continue to forecast significant GBP outperformance versus the EUR given the UK’s solid economic prospects and continue our call for earlier-than-expected rate rises from the BoE. As noted by MPC Members McCafferty and Weale in their dissents at the August and September MPC meetings, survey measures of wages show rapid acceleration, while firms appear to be absorbing GBP strength into higher margins rather than passing it on to consumers in the form of lower prices. However, the deterioration in the EU economy, the UK’s most important trading partner, represents a downside risk to GBP.
GOLD (as previously suggested by us), continues to FALL trading at $1193 as I write this. I was only a few weeks ago that I suggested (at $1240) that Gold was due a severe drop with a target of $1025!! So far SO GOOD!!!
This week will in all likelihood spring surprises and volatility. The Central Banks will continue to do “whatever it takes” to strengthen their economies and build growth numbers. Words will be carefully chosen, but what is certain is the market will drive the FX rates in line with the vastly different economic patterns we are witnessing. The USD will be the ultimate winner, but let’s not forget about the GBP and its own little tussle with the EUR. Target 0.7700 (1.3000) remains our short-medium term target. As things stand things are looking pretty good given our calls in recent months. We continue with our projections given any economic indicators to the contrary.
Good luck and have a great week ahead