ECB President sees reasons for further QE

Today's Highlights

• Sterling bounces on positive data

• Australian base rate on hold for now

• ECB President sees reasons for further QE

FX Market Overview

As Alphabet (the parent company for Google) becomes the most valuable company in the world, you have to wonder how 'finding stuff' has grown to be such an immensely valuable resource. I guess if a company that provides the mobile equipment to access the search engine is the 2nd most valuable company in the world, we really have moved on from making stuff. And then the third most valuable company is Exxon Mobile so we are back to the norm again. Is that a relief though!

Sterling started the week with a spring in its step after stronger than expected manufacturing and mortgage data. To be fair, Sterling has been under the cosh for weeks now, so it was overdue a recovery and just awaiting a catalyst. The Sterling – Euro exchange rate is the interesting one. There is a trend line at around €1.3270 which is capping this exchange rate at the moment. If the Pound can boost back through there, the opportunity exists for further GBP strength but it is a big IF. With the details of the UK's relationship with the EU due to be announced and a potential June referendum on membership, there is also scope for the Pound to be abandoned by traders; wary of the future for the UK economy. One thing is for sure, 2016 isn't going to be a quiet one for the Pound. We get the UK construction PMI index this morning. If that is as positive as the manufacturing one, Sterling could have another positive day.

We heard overnight that the Reserve Bank of Australia left their base rate on hold at 2.0%. They have chosen to hold tight to await further developments in China before cutting the base rate again and the Aussie Dollar gained a couple of cents against the Pound on the news but gave back those gains almost immediately after a very poor Consumer Confidence index was published.

Today's news comes mostly from the Eurozone. We get unemployment data which is likely to be just as poor as last month's 10.5% unemployment rate. It’s hardly something to make EU leaders smile but as long as it doesn't deteriorate further, the Euro will most likely shrug the data off. However, the Euro is under a bit of pressure after ECB President Draghi suggested the current level of very weak inflation was probably enough justification to cut interest rates again and perhaps add liquidity to the financial markets. We await further developments on that.

We get New Zealand's unemployment and wages growth data overnight tonight. Since the start of the year, the Sterling – NZ Dollar exchange rate has been caught in a range between 2.15 and 2.24 and we are slap bang in the middle of that range as I write. The forecasters seem to think the unemployment rate has worsened but wages are improving. That kind of mixed response won't change the current trading range for this pair but any upsets could well cause volatility. Be ready with an automated order and you could finish Groundhog Day with a smile.

And that leads me neatly on to the fact that it is Groundhog Day in America. Contrary to popular belief, that doesn't mean the day loops until Bill Murray gets the girl but Sky TV is showing the movie on a loop for the whole day. How very ironic of them.

Oh and there is no US data to speak of so the USD will most likely loop in its current pattern. See what I did there?

Thoughtful one liner found online

• Isn't it weird how when you drive beside a police car you feel paranoid instead of protected?

• Going to church doesn't make you a Christian any more than standing in a garage makes you a car.

• America is a country which produces citizens who will cross the ocean to fight for democracy but won't cross the street to vote.

• When you are tempted to fight fire with fire, remember that Firemen usually use water.

• The proper way to use a stress ball is to throw it at the last person who really annoyed you.

• Behind every successful student, there is a deactivated Facebook account.

USD

Sterling has been under pressure at the start of 2016 and this week has seen a continuation of that trend. We are still very close to the 6 year lows versus the Dollar and the Pound may well take its cue from the results we see on "Super Thursday". This is the quarterly event when we get the inflation report , the results of the latest MPC rate setting meeting , the minutes of the meeting and a press conference all within a couple of hours. There is a chance that uber hawk Ian McCafferty may join his colleagues in calling for no change in policy which would result in more selling pressure of the Pound. A test of 1.4000 would not be out of the question. There has been significant volatility already this year and Thursday is likely to give us more clues for medium term direction.

CAD

Following the decision to keep rates on hold last week, the Canadian Dollar rallied 3% against the Pound moving from the 2.08 region down to just above 2.02. Since then, continued concern with oil and the general outlook of the economy has seen the Canadian Dollar lose some of the gains seen last Wednesday. Unless oil sees a major turnaround, we would expect to see the GBPCAD pair trickle back towards resistance levels in the 2.07-2.08 region. Brent and crude oil dropped below US$29 per barrel, with Brent sliding to a twelve-year low on the 19th of January. Oil oversupply worries have continued as Iran returned to the export market with the United Nations lifting sanctions that paved the way to increase oil production by 500,000 barrels per day.

AUD

The downtrend in GBPAUD remains in play and it’s closing in on a key level of support, the bottom of the uptrend that’s been in place since the 2013 low at 1.434. It’s important that GBPAUD remains above the 2.00 level otherwise a break below that could open up a more sizeable fall towards the 1.90-1.93 level. We’ll hear from the RBA tomorrow when they hold their February monetary policy meeting and it’s unlikely that they’ll elect to cut interest rates after stronger inflation figures recently. It is worth keeping an ear out for the accompanying statement for clues as to whether they’re still downbeat over their domestic economy or more neutral in their approach to monetary policy. The ECB are expected to increase their QE program at the March meeting; combined with more easing from the Bank of Japan (cut interest rates to negative) and the US Fed pushing back the chances of another interest rate hike until late 2016; we are seeing more risk-appetite from investors. This is boosting demand on the higher yielding currencies like the Aussie and Kiwi whilst the demand on the Pound wanes. The Pound of course is struggling with concerns over the EU referendum vote and slowing growth here in the UK. Following on from the RBA on Tuesday, we’ll see the release of the Australian trade balance on Wednesday and NAB business confidence on Thursday and finally retail sales data Friday - a big week for the Aussie.

EUR

Sterling Euro consolidated within a tight 2 cent range this week. The Eurozone inflation came in line with market expectations, as inflation creeped up to 0.4% but remains well of the banks 2% target. This has again opened up argument of whether or not the ECB will press the button on further stimulus measures in the next meeting in March. The release of the UK GDP print showed Britain’s economy showing some positive growth in Q4, with the dominant service sector once again being the ultimate driver. Whilst construction continued to weigh down on the economy, Sterling Euro is approaching a key test, as a close above 1.32. This would not only be an important break of the immediate down trend but would also act as a break of the initial Fibonacci retracement of 23.6% from the move that begun in December.

NZD

Tuesday sees the global diary auction prices announced, following on from poor performance in January. Another disappointing figure could see the Kiwi sell off. Looking at the GBPNZD chart, it’s not looking particularly positive for Sterling sellers after two sizeable legs lower since August and the lack of any significant bounce off the December low the pounds still struggling to win over investors put off by a downbeat Bank of England and concerns over a possible “Brexit” this summer. At the moment we need to see a test and breakup through the 2.25 to give us optimism that another push higher is on the cards and on the downside a move below 2.15 could open up 2.10 initially onto 2.02. Wednesdays’ NZ jobs data should it disappoint will help support a bounce in GBPNZD and give the RBNZ more ammunition to cut interest rates later this year.

EUR/USD

The single currency has been range bound for the last few months between 1.07 and 1.0970 as attentions turns to events in China and the oil prices, the currency is largely ignored. Mario Draghi has hinted that the European Central bank still has ammunition in their armoury and that they will reassess their options at the next meeting which is not due until the beginning of March. Traders having been burnt the last time, Mario Draghi made a promise they are in no hurry to put large trades on until they see what the ECB are planning. This could involve another cut of the deposit rate and/or further quantitative easing. We may not see significant movement either way unless the rhetoric picks up or the data takes a fundamental shift in one direction.