Editor's Note: Below is a complimentary research note from Hedgeye Analyst Matthew Hedrick published on March 7, 2014 at 10:25 AM. FXB is currently one of the top ten stock picks in our Investing Ideas Newsletter. For more information on how you can subscribe to Investing Ideas, click here.
The EUR/USD and GBP/USD have ramped an impressive 1.96% and 2.15%, respectively, in the last month -- the performance is consistent with our Q4 2013 Macro Theme call of #EuroBulls (presented on 10/11/2013) and our bullish outlook on the British Pound since last November.
Below we update our outlook on each currency cross:
- ECB President Mario Draghi kept rates on hold this week (as expected) and did not issue any “new” non-standard measures, adding in its 2014 outlook for GDP to expand +10bps to +1.2% (vs the previous forecast in December) and inflation to dip -10bps to 1.0%.
- Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and to keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market #EuroBulls (etf FXE).
- On the other side of the cross (USD) we expect Fed-head Janet Yellen to likely pull back on the tapering program to a more dovish position in response to our Macro call of #GrowthSlowing that should weigh on the USD to the downside.
- EUR strength reflects country/regional strength: Manufacturing and Services PMI continue to remain grounded above the 50 line (expansion). Services hit a 32-month high at 52.6 in February and Manufacturing grinded higher to 53.2.
- Confidence up: Eurozone Feb Economic Sentiment Indicator rose to 101.2 in February (exp. 100.9) vs 100.9 in January. The Services Sentiment Indicator rose to 3.2 FEB (exp. 2.5) vs 2.3 JAN.
- The deflation of inflation across the Eurozone (the current reading at 0.8% Y/Y) equates to more consumer purchasing power via lowering the consumption tax.
- Other Data: Eurozone Retail Sales rose to 1.3% JAN Y/Y (exp. -0.2%) vs -0.4% DEC and the Eurozone Unemployment Rate maintains the 12% level.
- We remain marginal European equity bulls over US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB).
- We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve).
- The Bank maintaining the base interest rate at 0.50% this week along with its asset purchase program target (QE) 375B GBP.
- UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers. In the BOE’s Quarterly Inflation Report (in February) 2014 GDP was revised higher to 3.4% from 2.8% previously forecast.
- PMIs remain one highlight: Manufacturing in February came in at 56.9 versus expectations of 56.8 and Services recorded 58.2 versus expectations of 58.0.
- CPI has also moderated in recent months, currently at 1.9% in January Y/Y – we expect this cut in the consumption tax to continue to boost business and consumer confidence and with it consumption
- The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.