GBP/EUR 1.3480 (0.7420)
Markets continue to trade in tentative territory, equity markets are struggling to hold Q1’s record highs and selling continues in global equities. European equity markets are struggling to find a footing despite the ECB pumping QE into Eurozone bonds which has traditionally seen investors looking outside low to negative yielding bonds, while even the prospect of lower interest rates for longer in the US has not helped US equities extend their gains. There certainly has been a feeling that equity markets have been overvalued and the recent highlighting of a global slowdown perhaps encouraging profit taking amongst equities, especially as evidence emerges that even the US which had been leading the way is susceptible to global issues. On-going Greek debt negotiations are also playing their part in adding to the prevailing uncertainty. In currency markets the USD faced selling through yesterday’s session following several days of gains. The EUR remains firm with EURUSD trading back above 1.1200 and EURGBP just below .7400.
Greece is never far from the headlines or market concerns and today there will be some focus on the beleaguered nation as they try to raise €875 mln in a six month bill sale, ahead of a scheduled repayment of €1.4 billion due on Thursday. In the meantime the ECB’s governing council will meet to discuss Greek Banks continued access to Emergency Liquidity Assistance (ELA), the ECB have kept this facility open for Greece but in recent months have been voicing concerns showing indications that they may not make it such an attractive proposition, any further signs the governing council wish to tighten requirements on Greece may give rise to concern of a cash crunch in Greece – the EUR however is suggesting no such concerns, perhaps complacently is once again the status quo with Greece, at least until next week’s Eurogroup meeting. This morning Eurozone services and composite PMI readings cross the wires with retail sales also on tap. Eurozone data has been to the upside recently and certainly contributing to providing the single currency some lift, but permanent EUR strength on this is unlikely to be sustainable as the Eurozone bottoms out from a very low ebb.
Last week, weak UK manufacturing data knocked GBP off its +6% surging rally against the USD and yesterday we saw weaker than expected construction PMI figures cross the wires but this failed to impact the pound in the same manner. In fact GBP rallied some 1% vs the USD. However a decline in GBP against the EUR would suggest is was broader USD selling helping the pound. Services PMI data is up today and this carries greater implications for GBP given its far larger contribution to GDP. The employment and wage component of the release will be closely watched and expectations are for the growth in the sector to have slowed to 58.5 from 58.8, anything lower will likely see GBP under renewed selling pressures. Needless to say a better than expected reading will help GBPUSD test recent highs while EURGBP can expect downside pressure back towards .7330. UK elections polls continue to show an outcome is too close to call, this may well cause GBP some uncertainly in the next 48 hours as polls open tomorrow morning with a outcome expected by Friday morning. Data suggests there is a 90% chance of a hung parliament, which means the outcome for GBP will be dependent on what coalitions form.
The USD faced selling pressure following the release of the US trade balance which was over 24% worse than expected at a -$51.4 billion deficit. We have been highlighting the weaker Q1 for several months and again this highlighted the huge lag experienced. There were also some contributing factors impacting this huge deficit but the end outcome has seen Q1 GDP estimates revised lower, so far I’m seeing a range from 0% to -.8%. Sadly for USD this did over shadow more recent April data in the ISM Non Manufacturing reading which was better than expected at 57.8 vs 56.2. There have been signs already that April data has turned the corner from Q1. Looking ahead to today we will be awaiting the ADP employment report which is expected to show 200k jobs added the US economy through April, this report can serve as a guide for Fridays NFP so a good reading here may well see the USD advance in some pre-positioning to Fridays NFP report. There will also be several Fed speakers across the wires later Including Yellen speaking on the IMF panel in Washington and Lockhart speaking on Monetary policy later in the evening.