GBP/EUR 1.3618 (0.7341)
The slide in the USD has continued in earnest this week, there was some surprise amongst markets that the sudden USD sell off following the FOMC’s Wednesday release had all but totally reversed itself by the next morning as the sudden bout of greenback weakness was taken as an opportunity to buy at better levels but now, three full trading days later and USD index is once more looking at testing last Wednesday’s spike lows. The heavy positioning for USD strength was evident in the reaction to the more dovish FOMC statement and it now appears that the USD is catching up with interest rate expectations that are now showing a rate hike may not occur until Q4, vs mid-summer as many expected this time last week.
Adding to the drop in USD demand was a weaker than expected release of home sales data which grew slower than expected, once again adding to the concerning trend that the pace of US growth is slowing, with many data points weaker than predictions. Comments from the Fed’s Vice Chair Fischer yesterday also suggest that a rate hike “will likely be warranted” by year end, far from the recent bout of confident rate hike calls we’ve seen from Fed officials lately. Later in the session focus will be on the US CPI reading, the core reading is expected to rise 1.7% ( a three month high) however once again CPI is a reading that has been trending lower than estimates. A weaker than expected CPI report will be a further catalyst to begin selling USD once again.
Looking towards the European session and attention will be on UK data releases, most notably the CPI inflation reading. Low inflation is the thorn in the side of many central banks and the BOE are no exception, especially when many other data points are performing admirably. The BOE have warned that they expect the headline CPI reading to drop into deflationary territory in the coming months, while the core reading is expected to fall 1.3% vs 1.4% in January. With inflation so far from the BOE’s target of 2%, the MPC are unlikely to be in a rush to raise interest rates and this in turn is impacting the potential strength of GBP. Off all UK data releases in recent months CPI has tended to be to the low side of expectations and similar to the USD, a weak inflation print is likely to encourage further GBP selling.
The EUR is almost enjoying its time out of the lime light, Greek/German negotiation have not quite reached fever pitch just yet so the EUR is content to ignore most headlines relating to that for now. For the most part Eurozone economic data is almost being overlooked in terms of longer term EUR trend generation but we have seen some improvements. Eurozone PMI data released this morning has helped EURUSD push towards 1.1000 once again, the Eurozone reading for services and manufacturing PMI beating expectations, helped by better than expected German readings from the core of Europe. The EUR has taken its time out of the limelight to claw back some of its lost ground through March, with EURUSD and EURGBP both now back around level we opened the month.