Never mind the euro, here's the pound sterling
- ECB restricts Greek access to direct liquidity lines
- Pound sterling may have the most to gain from ECB QE
- Tomorrow's US jobs report likely to prove significant for USD
By Neil Staines
Markets wobbled overnight on the news that the European Central Bank will suspend the "waiver affecting the marketable debt instruments issued or fully guaranteed by the Hellenic Republic" based on the fact that "it is currently not possible to assume a successful conclusion of the programme review".
Effectively, the move restricts Greece’s access to direct liquidity lines and forces the country’s banks to fund their (significant) liquidity requirements through the Greek Central Bank under the Emergency Liquidity Programme.
The announcement of the ECB action brought sharp EUR selling in FX markets. However, the most likely outcome is still some kind of compromise on interest rates and the duration of the Greek debt burden.
While this dents the hubris (and perhaps the credibility) of the new Greek government and its pledge to cut the debt burden, the amount of collateral that this ruling affects is not huge and in the medium term, the Eurozone has bigger problems than Greece.
“ECB actions will have an impact on the UK”
– David Miles, MPC member at the Bank of England
On a number of occasions recently, we have discussed our view that the big winner of ECB quantitative easing may well be GBP, as QE is an attempt to underpin falling demand and stimulate growth in the Eurozone – previously two key risks to UK growth.
We retain a strong view of the prospects for the UK (at least relative to its peers) and indeed GBP.
Yesterday’s service sector PMI rebound outlined a maintained momentum in the UK economy at a pace that dwarfs the best of the Eurozone. A Confederation of British Industry survey released this morning shows that the recovery is becoming increasingly widespread in the small- to medium-sized enterprise sector, which bodes well for economic and wage growth going forward.
Add to this the increasingly encouraging employment and growth statistics from the UK’s booming tech sector and the stage is set for better things to come.
Notwithstanding this encouraging economic backdrop, the UK and GBP will face the headwind of political uncertainty over the next couple of months. Over this period, however, we also expect further improvements in the labour market, strength in consumption and perhaps most significantly, more pronounced wage inflation.
Amid likely heightened volatility, we expect GBP to continue to outperform expectations and its peers in 2015.
“The man who has experienced shipwreck shudders even at calm sea”
In many respects, this week in FX has been relatively calm in comparison to the events of January. However, following comments from Cleveland Federal Reserve president Loretta Mester overnight that the Fed’s guidance "should evolve over the next couple of meetings" –consistent with our view of a rate rise in June – tomorrow’s US employment report for January should prove significant for the USD and for expectations.
From our perspective, the most important component of the release will be the average hourly earnings data, where we would err towards an upside surprise and renewed USD outperformance.
For today, we would expect a more pronounced two-way trading market as participants probe the depths of activity and liquidity at recent range extremes. Over the coming weeks, however, our FX view remains biased towards further USD and GBP outperformance against EUR and AUD in particular.
— Edited By Michael McKenna
Neil Staines is head of trading at The ECU Group.