Euro falls on weak Spanish & Ferman inflation data: Nov 28, 2014

Market Review - 27/11/2014 22:58GMT

Euro falls on weak Spanish & Ferman inflation data

Despite euro's brief bounce to 1.2524 in European morning on Thursday, failure to penetrate Wednesday's New York high of 1.2532 prompted investors to sell euro again. The pair subsequently dropped to 1.2466 on speculation of more stimulus measures by ECB next Thursday after the relesae of lower than expected Spanish and eurozone inflation data.

ECB President Mario Draghi said at an event organised by Bank of Finland that 'lack of structural reforms in euro zone raises spectre of permanent eco. divergences, threatens essential cohesion of union; some form of backstop for sovereign debt could protect its safe haven status in euro zone; euro zone countries need to invest in other mechanisms to share cost of shocks as there are no fiscal transfers; euro zone countries' economic fortunes could permanently diverge if they fail to undertake structural reforms, posing a risk to the cohesion of the currency bloc.

Draghi said "lack of structural reforms raises the spectre of permanent economic divergence between members; and insofar as this threatens the essential cohesion of the Union, this has potentially damaging consequences for all EMU members; EMU countries need to invest more in other mechanisms to share the cost of shocks. Some form of cross-country risk-sharing is essential to help reduce adjustment costs for those countries and prevent recessions from leaving deep and permanent scars; some form of backstop for sovereign debt could prove useful."

Draghi said 'governing council unanimous in commitment to using additional unconventional measures if necessary; should be clear that monetary policy alone cannot do all the "heavy lifting".'

The greenback ratcheted lower on Thursday due to the weakness in Nikkei-225 index which closed down by 135 points to 17249. The pair dropped to an intra-day low of 117.25 in European morning before rebounding to 117.79 on short-covering later in the day.

In other news, China PBOC's vice governor said 7.4% growth for China is reasonable; no need for China to change monetary direction; a problem that cooling inflation is lifting real interest rates.

Despite initial sideways trading in Asia on Thursday after Wednesday's rally to 1.5807, the British pound found renewed buying interest at 1.5778 and briefly penetrated 1.5807 in European morning. Cable rose to a fresh 2-week high of 1.5826 before falling to 1.5716 near European closing.

BoE Governor Mark Carney & BoE Chief economist Andrew Haldane that U.K. rates are likely to go higher, Reuters reported results from a poll that the 1st hike in British interest rates will now come in the 3rd quarter of next year, 6 months later than previously thought, owing to low inflation, sluggish pay growth and a weak euro zone economy. 32 of 50 economists in the poll conducted this week forecast Bank Rate at 0.75% by the end of Q3 2015, breaking a long-standing consensus for a 1st quarter hike. That shows economists may finally have narrowed the gap between their expectations n what financial markets are pricing in. Short sterling interest rate futures are fully factoring in the 1st rise in the 1st quarter of 2015.

The British economy grew 0.7% in the 3 months to Sep, data confirmed on Wednesday, although, most of that growth came fm household spending instead of business investment which unexpectedly fell. The BoE predicts inflation might fall to below 1% over the next six months and may hit its target of 2% only towards the end of 2017.

Friday will see the release of Japan's unemployment rate, CPI, prelimary industrial output, IP forecast, retails sales, New Zealand's NBNZ business outlook U.S. Gfk consumer confidence, Japan's construction orders, housing starts, Swiss KOF indicator, EU inflation and unemployment rate, Canada's GDP and producer prices.