Stress test rumours and US CPI keep EURUSD pressured

• US CPI held at 1.7%, dollar supported mainly on EUR weakness

• Bank of England focus on the negatives in latest minutes publication

• EURUSD slips on rumours that 11 banks have failed ECB stress tests

• UK retail sales due while pressure on single currency expected to continue

US CPI did not follow the rest of the developed markets in falling back through the month of September, sticking resolutely to the 1.7% level. While not a huge movement, and given October’s number is tracking negatively, this is not something that will produce an imminent inflationary bump; the move did bring market and Fed expectations on the timing of rate hikes slightly closer together.

Truth be told it looked like a large amount of the USD strength seen yesterday was as a result of further weakness in the European single currency. As EURUSD fell, the momentum of USD buying increased. Nobody wanted to be left out of taking the single currency lower. Selling the euro still remains the largest conviction trade in currency markets in my opinion and further pressures on EUR are only expected through Q4.

Yesterday’s weakness came after Spanish news agency EFE, citing unnamed financial sources, reported that as many as 11 Eurozone banks were set to fail the upcoming balance-sheet focused stress tests due over the weekend. The ECB will publish the test results for 132 financial institutions on Sunday and warned yesterday that individual reports on the banks had not been sent out as yet and that any inferences were “highly speculative”. Following the Reuters report on Tuesday that the European Central Bank was looking at buying corporate bonds to boost euro liquidity, all eyes are back on what liquidity and support mechanisms Mario Draghi will provide the Eurozone economy.

Today’s PMI run from the Eurozone is set to maintain the recent climate of a deteriorating economic landscape. Sentiment readings of the German economy have sunk hand in hand with the official output numbers and additional slowing will primarily lead markets into another German recession call. We have already pencilled in that the German economy will be in a technical recession when its GDP reading for Q3 is published later in the month. Euro bulls will be looking to see whether the recent declines in the euro rate have generated additional export strength in French, German or wider Eurozone manufacturing and services industries.

Sterling came lower across the board following the Bank of England’s latest policy minutes published yesterday morning. The MPC viewed that pressures on the UK economy from the Eurozone and China have increased and were the main concerns of the Bank of England. Alongside recent falls in inflation and wage growth, the market seems justified in shifting its expectations of when the Bank of England will look to start normalising monetary policy into Q3 of next year.

Momentum within and without the UK economy has slowed; we have seen slowing growth in China, the US, the Eurozone and likely the UK this Friday. Wage growth is still lacklustre, and while prices have come lower in food and energy, the support for the consumer is unlikely to be cut anytime soon. The MPC seems all too happy to lean on these issues to justify its current policy stance and you would think that these thoughts have only been strengthened by last week’s 1.2% CPI number, the lowest in five years. I am still maintaining our view that a February rate rise remains the most sensible so as to allow the MPC ample time to slowly bleed interest rate rises into the UK economy.

I am looking for sterling to rebound a little from its Bank of England induced funk with the publication of the latest retail sales numbers. Last week’s news from the British Retail Consortium that retail sales fell by 2.1% in September compared to the same month a year ago as the effects of the unusually warm beginning to autumn weighed on the demand for winter apparel were not a positive. However, I am looking for the recent slip in inflation to marginally increase real purchasing power of consumers through Q4. The figure is due at 09.30.

Have a great day.