Key focus and themes: Foreign Exchange - Asia ex-Japan/Euro Area/Europe

Research evidence excerpt

Key focus and themes: Foreign Exchange - Asia ex-Japan/Euro Area/Europe

en higher by energy prices). In the UK,

momentum in recent inflation and wage data has been slowing, which suggests the hike

that remains priced into the UK rate curve could be vulnerable. Political risk premia appear

to have dissipated for GBP in recent weeks, with likely incoming Prime Minister Andy

Burnham making the right noises on fiscal rules. However, he has not made many (or any)

clear policy announcements, and we remain concerned that he will look to either raise

taxes significantly (creating downside risks to growth and investment) or risk a further

worsening of fiscal dynamics, as warned by the OBR, which recently noted that

GBP100bn of savings were needed for the UK’s fiscal path to return towards stability.

EUR: Keep a close eye on oil and gas prices and the ECB’s reaction function

EUR remains more vulnerable to external factors than domestic developments right now.

Although market pricing for the ECB has swung back and forth in recent weeks, there is a

risk that the hawks on the committee will gain a bit more momentum because of the recent

bounce in oil and gas prices, following a rebound in Middle East geopolitical volatility. The

likes of Isabel Schnabel have been quick to warn that it was too early to conclude that the

impact of higher energy prices was fully factored in. This could leave the ECB with a

slightly more hawkish reaction function than many of its peers. Meanwhile, recent data

have started to improve relative to soft expectations. Various measures of euro area

economic surprises are turning higher, and in the last week we saw better-than-expected

data in the Sentix survey, German factory orders, industrial production and trade data.