GBP/EUR 1.2503 (0.8000)
The story of the week has been the lack of drive in equities following several weeks of fresh highs. The grind higher has always been slow and the validity of the fresh highs has always been questioned with a lack of conviction in any major follow through. This week’s sell off in stocks has been equally unconvincing, and yesterday’s performance was no different. European stocks closed the day relatively flat, while in the US the decline was also minimal. On the currency front the JPY has been one of the stronger performers, a slight risk adverse market has helped lift the Yen which was further supported by stronger data with the jobless rate expected to hit 3.5% (a 16 year low), while inflation is expected to rise to 3.7% (a 20 year high).
Data from Europe was on the light side yesterday but the UK had the release of the Financial Stability Report where Mark Carney outlined tools to curb the housing market bubble. All in all there was very little from this on monetary policy, new stress test applied to mortgages should cover a rate rise to 3%, with restrictions put on the leverage available for buyers. Carney did comment that these were the first steps; rate increases could form part of the process but only as a last resort. The pound had a mixed bag yesterday although was marginally up on the day, still recent ranges remained in play with both GBPUSD and EURGBP covering the full weeks range through 1 day.
Carney has been back on the wires again today and like the last two weeks he has been clear as mud trying to curb market volatility! Carney said rates could be raised this year, or early in 2015, but more importantly he did say that rates would return to their “normal” levels by 2017, interesting however he highlighted that this would be a “new Normal”, with rates around 2.5%, not the 5% level we experienced pre crisis. The final revision of UK GDP crosses the wires this morning, .8% growth is expected to be confirmed, once again given GBP positioning a downside surprise would have greater impact on GBP pairs.
The EUR has had a quiet week on the data front and it’s taken the opportunity to find some strength, rallying back above the 1.3600 mark during the week and holding above. Yesterday however saw EURUSD cover the full weeks range, a run lower towards 1.3580 quickly reversed to close the day back above 1.3620 before the sell off began once again this morning. A downward revision to French GDP to .7% from .8% through Q1. The EUR may face further selling should CPI data from Germany disappoint, the figures are due to show a modest rise to 1%, up from a four year low of .9% through May. Germany has been underperforming expectations in recent months, another slide in CPI will see louder calls for the ECB QE style program.
For now the USD can’t seem to catch a break, stronger data all week saw the USD little changed, there have been two negative releases, we know the Q1 reading was terrible but this is well in the past at this stage and yesterday’s PCE Deflator was also lower than expected. This benchmark for Fed inflation was expected to rise .3%, but the actual print of .2% encouraged further USD selling. The greenback took little solace in comments from the Feds Bullard as he spoke on Monetary Policy in New York, the St. Louis Fed President called for rates to rise as soon as Q1 2015, and stated earlier rate increases were favoured than keeping policy at all-time lows for a prolonged period.