Euro bounces back as QE programme brings results

Enrique Díaz-Álvarez20/Apr/2015Currency Updates

In the absence of dramatic news, both the Euro and Sterling bounced back from recent lows to end the week near middle range. Investors and traders are waiting to see whether the recent softness in US data is a temporary consequence of harsh winter weather or a deeper-seated slowdown. So far, the data in April is pointing to the former, but we have yet to see the critical payroll report to confirm one way or the other. Until then, major currencies are unlikely to break out of the current range, which in the case of the EUR/USD pair is bound between the 1.05 and the 1.10 levels, and in Cable between 1.46 and 1.50.


Two critical reports were released last week, one on inflation and another on the labour market. Headline inflation in the UK held at 0% YoY, while the core index slid from 1.2% to 1.0%, both roughly in line with market expectations.

More positive news came from the labour market. Unemployment dipped again, and the single-month level for March is now at 5.4%. Underlying pay growth (i.e. excluding bonuses) rose to 1.8% YoY, with a strong acceleration in March to 0.4% for the month. UK wages are now growing at a nearly 2% in real terms – the strongest pace in any major economic area. These numbers will provide comfort to the Bank of England that the British economy can sustain moderately higher rates and are consistent with our view of a first hike in early 2016.


In line with our views, no critical announcements were made at this week’s ECB meeting. Further, President Draghi reaffirmed the Council intention to see through its quantitative easing program all the way to September 2016, as initially planned.

Economic data last week provided further confirmation of a modest strengthening of the recovery. Industrial production in February was up 1.1% in the month, nearly 3% above the average level of the last quarter of 2014. We had further good news from the Euro area lending survey, which showed banks easing lending standards further. The ECB’s QE program, by pushing downward Government bond yields and reducing the attractiveness of the carry trade, is forcing banks to deploy their capital elsewhere, by increasing their loans to households and businesses. This is exactly the intention of the program, and the central bank is rightly pleased with the results. This positive news was enough to push EUR/USD up, in spite of continued jitters about the (lack of) progress in the talks between Greece and the Eurogroup.


News out of the US last week was mixed, but, on balance, seemed to point to a modest pick-up in growth after the January-February slowdown.

Retail sales in March bounced back from three consecutive negative prints, up 0.9% for the month, though the number was slightly short of expectations. Industrial production also edged up, but not enough to make up for the January-February decline. More comforting news came from the inflation front. The more critical core inflation rate, which strips the volatile food and energy components, rose 0.23% in March. It is up 1.8% for the year and an annualised 2.3% over the past three months.

The message is clear: deflationary pressures are fading in the US, and emergency settings in monetary policy are no longer appropriate. Therefore, we continue to expect a Federal Reserve hike at the June meeting, although we are paying very close attention to incoming macroeconomic data.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.