GBP/EUR 1.2309 (0.8123)
Risk appetite remained subdued through yesterday as 11 of the major European indices fell with the CAC, DAX and FTSE all lower on the day. Stocks in the US were also on the defensive as we saw traditional risk adverse assets in demand. The USD was marginally firmer on the day overall, while the JPY has been one of the strongest performers so far this week. Overnight the BOJ opted to keep current policy on hold, this saw a sell off in Asian equities but helped the Yen rally to its strongest level in three months against the USD, while also gaining ground against all other major counterparts.
Yesterday the major release of the morning came from the UK as a host of inflation data was released with traders focusing on the CPI release in the belief this inflation reading will drive BOE policy. Our regular readers will know that we have been of the view that there is an awful lot of positivity priced into GBP crosses, particularly GBPUSD.
The interesting point yesterday was the release of far firmer inflation figures with the core reading rising to 2% year on year as benchmark CPI rose at .4% through April. Such a reading should have seen GBP bulls driving sterling crosses higher but aside from the initial rally, GBP returned to early morning levels through the morning.
This price action further supports our view that speculative positioning based on UK rate increases is approaching over done levels but the pound is not finished yet. This morning we have another round of key data from the UK, the BOE minutes are due for release at 9.30 and headline the European calendar, while UK retail sales are also on tap.
Based on last week’s inflation report the MPC are far less hawkish on rate increases than the market has been pricing, should the minutes support this view we are likely to see the pound face some selling pressures. Any indication of dissension amongst the MPC however may provide some hope for GBP.
The Euro has struggled to get off the ground following the ECB’s May meeting knock down, EURUSD has traded within a 55 pip band for much of the last week. Action from the ECB in the June meeting is almost a forgone conclusion however Eurozone interest rate markets and the Euro rates are not fully reflecting major action from the ECB.
While this could reflect doubt in the ECB, it is more likely to reflect uncertainty on the actual tools that will be used. Over the last 7-8 months we have heard numerous tools discussed: Outright asset purchases, programs targeting specific lending, traditional rate cuts to the base rate, or deposit rates into negative territory and more. Some would have a greater impact on the Euro than others so until we see further clarity the single currency may well consolidate, although risks are favouring the downside. Consumer confidence on tap this afternoon is unlikely to shape ECB policy so should have little lasting effect.
The USD has made some interesting developments over the last two weeks. We have not yet seen any major trend shift in the USD but one thing it has been is relatively consistent. We have been through a number of different types of markets in the last few weeks, with risk aversion on political tensions to full out risk rallies as equities reach fresh highs. Through this we have not seen the USD rally or sell off in any aggressive manner. Overnight the USD has been stronger against risk currencies, while losing ground against the Yen. The USD certainly appears to be shaping up for a larger move, timing and direction is now down to the Fed and their policy horizon.
Later in the day our attention turns to one of the largest events risks of the week in the form of the FOMC Minutes from the April meeting. Traders will be looking towards the FOMC’s confidence in tapering continuity, especially as the US appears to be accelerating in growth through Q2. Comments acknowledging this accelerated return to growth from Q1 would go a long way to convincing markets that tapering will conclude in autumn, and would not harm the USD’s outlook.