(12 February 2020)DAILY MARKET BRIEF 2: Euro, pound rebound from multiple-month lows.

The euro fell to a four-month low against the US dollar on Tuesday after the investor confidence data missed expectations at a time when confidence was most needed. In her speech yesterday, the European Central Bank (ECB) President Christine Lagarde called for higher government spending, as did her predecessor Mario Draghi multiple times, in vain. If the ECB seeks government support, it is because the European companies prefer investing their cash in the market despite very low returns instead of borrowing at negative rates. This trend could be easily tracked in production data. Due later this morning, the industrial production data in the Eurozone should confirm a 1.8% m-o-m contraction in December versus 0.2% printed a month earlier amid production in Germany took another and an unexpected hit. Soft figures come as a warning that the improvement a month earlier may have been temporary. The fear that German slowdown has probably not bottomed out just yet means that the ECB could be tempted to lower the interest rates in the future, though as discussed above, we are unsure that deeper interest rate cuts would remedy to Europe’s low investment problem. Even though our base case scenario is that the ECB would keep interest rates unchanged until normalisation, each soft figure adds to the probability that this could change and weighs on the single currency by increasing the core short positions.

Across the Channel, the fourth quarter growth data showed that the UK narrowly avoided an economic contraction, as production remained subdued in December. The consumer spending rose by the lowest since 2015. Due next week, inflation should show a rebound in January, but even that could remain insufficient to improve the sentiment in Sterling, which looks poised to revisit the 1.28 levels in the coming weeks. Risk reversals for both short and long term maturities tell us that investors increase hedges for a softer Sterling against the US dollar, as mounting anxiety regarding the second phase of Brexit negotiations and the expectation that the Bank of England (BoE) would cut the rates by 25 basis points in the first half of the year continue weighing on the currency.

FTSE (+0.17%) futures hint at a soft positive start in London. Small rebound in oil and cheaper sterling may give a certain support to the British blue-chip index but may not suffice to maintain it above the 7500p level.

By Ipek Ozkardeskaya