The biggest mover of the week in currency markets was the pound which plummeted. Probability of a May rate hike from the BOE dropped from almost 84% to less than 30% in a few short days last week as inflation came in far lower than expected. The resulting decline in GBP saw GBPUSD drop 2.75%, while GBPEUR dropped almost 2% from highs of 1.1600 to lows below 1.1375. On the other side of the coin the USD rallied throughout last week, recovering from an early sell off on Monday as US treasury yields approach 3%, stronger USD data, some firmer earnings and a lack of escalation in trade war talks all helped the greenback to a solid week. This leaves the greenback at a pivotal crossroads, technically its sitting at a key point and we could well see a breakout of USD strength should key technical areas give way. The euro was caught somewhere in the middle of all of this, overpowered by the stronger USD while it easily held weight on the weaker GBP in the latter half of the week. The single currency was also notably stronger vs CHF, touching 1.2000 for the very first time since the SNB removed the floor in Jan 2015. This week however focus for the euro will be on Thursday’s ECB meeting and this leaves it vulnerable to dovish sentiment, especially given the recent weaker run of Eurozone data.
This is a heavy hitting week of fundamental data even before Thursday and while there is no change expected from the ECB in Thursday’s meeting, with rates and asset purchases expected to remain on hold, we all know that the action around ECB events happens in the guidance and not the actual action! That being said, given the relatively consistent strength of the euro since the last ECB meeting, where they highlighted their concern on euro strength impacting inflation, we would not expect to see any tightening talk from the ECB. On the contrary, while the euro faced some selling following the ECB minutes and does sit towards the lower end of its ranges for the year vs USD and GBP (amongst others), there still does feel like there is some positioning for the ECB to begin tightening or raising rates/decreasing asset purchases. Given recent data and the broader tone of the ECB on the importance of easing to the Eurozone economy I find this an unlikely event in the coming months and if anything I think the risk for euro pairs is additional weakness should the ECB “do a Carney” and question the markets positioning on the euro. Services and composite PMI data released this morning was firmer than expected and yet the euro continues to sell off, while the ECB’s Coeure speaks late today.
The pound should be well positioned now for no change in May’s BOE meeting but sterling weakness could well continue given a whole host of BOE speakers over the next couple of days. There is also the mounting pressure on PM May, as UK positioning on the Irish boarder was dismissed as “fantasy” by those within the EU close to negotiations. The big drop in GBP came as inflation fell well below expectations, there’s really no other reason to look to raise interest rates in the UK other than as a tackle of inflation. GDP has been on the slide, household debt remains at record levels and while wage growth is now finally positive, raising interest rates would only create far more concerning for the UK economy, ahead of major uncertainty.