GBP/EUR 1.2090 (0.8271)
Risk remained well supported through yesterday as US and European equities continued higher with the S&P extending its record highs. Weaker than expected PPI data was ignored in Europe with the focus on a private payrolls report from the US which indicated 191k jobs were added to the economy through March, this was below the 195k expected however a large upward revision to February figures up to 178k was enough to negate the negativity. Overnight stocks in Asia were mixed, Chinese equities rallied as China outlined stimulus plans. On the currency front the USD closed close to monthly highs despite the positive risk environment and overnight the AUD sold off from close to four months highs as retail sales data was below expectations.
Despite the broader risk positive environment with rallying stocks, the USD continued higher as signs that the US labour market has shaken of its winter cold and is on a more sustainable path to jobs growth. The ADP employment report certainly helped lift expectations that Friday’s Non Farm payrolls report will be more positive than the last three weather affected months. This supports the Feds outlook that they will continue to wind down their QE program.
Comments from the Fed’s Bullard indicated he saw rates rising in Q1 next year which saw US treasury yields rise, supporting the greenback and helping it move higher as it gained on all majors with the exception of AUD. The bigger picture in the US remains tomorrow’s jobs report but this afternoon the ISM non manufacturing composite is due to show industry growth continues to expand. Weekly Jobless claims are also due for release but are likely to be overshadowed by the start of the ECB press conference.
The last two days we have outlined possible reactions to the ECB announcement. We highlighted the likelihood of a EUR rally should the ECB remain on hold, with no rates cuts, negative deposit rates or QE style easing. We have also warned of the risk of a surprise, with markets pricing in a 95% probability the ECB will do nothing, should they surprise the EUR is very likely to face an aggressive sell off.
Our job here is to highlight the currency risks to our clients, on this front we have to take the ECB on their word, in that they are prepared to act should the inflation situation deteriorate, but we are not quite at that stage yet. The ECB have been masters of verbal intervention but the strength of the EUR is causing them issues, and should it continue to remain in demand action will have to be taken to depreciate the currency and tackle the disinflation environment that is prevalent in the region.
The pound is a little lower on the week as data has not exactly been supportive of the stronger interest rate outlook. Manufacturing data was lower, yesterday’s construction report was also lower than expected posting 62.5 and keeping the construction index from returning back to recent highs. The services industry accounts for a huge proportion of the UK economy and today we get service PMI data and although the pace of expansion is expected to slow moderately should it follow the rest of this week’s UK data and disappoint we would expect heavier GBP selling.