GBP/EUR 1.2566 (0.7960)
The positive environment for risk continued through yesterday’s session as European shares experienced their biggest two day gain in over four months, the prospect of additional easing, via asset purchases, from the ECB saw investors increase their appetite for risk and yield. The positivity continued into the US session where we had the first major releases of the day and a bumper headline Durable goods order figure, which helped lift the S&P over that key 2000 level where it managed to close the day. Doubts still remain on the conviction of the recent moves higher in equity markets with more and more commentators voicing concerns on overvalued equities, however as long as central banks continue to remain accommodative and interest rates remain near all time lows, it appears investors will continue to look for returns via equity markets or other higher yielding assets.
Monday’s UK bank holiday appeared to have been beneficial for GBP as the currency halted 7 straight weeks of declines against the USD, unfortunately with the return of the UK markets yesterday GBP selling resumed, only holding ground against the beleaguered EUR as well as NOK, SEK and PLN. The lack of data from the UK this week leaves GBP vulnerable to the weakening trend it has developed, especially against the USD which has begun to build some momentum behind it.
The EUR is probably the only other major currency that has greater downside potential than GBP at the moment. It has to be highlighted that the UK economy is still performing extremely well, although this is expected to slow marginally through the second half of the year the BOE are still on a path to raising rates. The ECB are looking at a very different scenario, growth and inflation continue to be a concern and the market is now beginning to price in further easing from the ECB, steps the Fed and BOE took 3-4 years ago. Diverging monetary policies put the EUR at risk of further downside against GBP and the USD.
Today’s calendar is also light on any major European releases, data released already saw German import prices fall .4% through July versus an expected decline of .1%, while GfK consumer confidence from Germany was also lower than expected posting 8.6 versus 8.9 previously. Thursday and Friday carry further risk for the EUR, further employment, inflation and confidence figures for Germany and the Eurozone are all due across the wires.
Currency markets have all been about the USD for the latter part of the summer, an improving labour market in the US, a steady pace of Fed tapering and a bumper Q2 GDP figure have all seen the value of the USD rise as markets anticipate the Fed will look to raise rates sooner than initially forecast. Comments from Fed Chair Janet Yellen have also begun to sound a little more upbeat on recovery, adding to speculation the Feds path to raising rates is getting shorter.
Data from the US has tended to be to the upside on the whole but there has been several mixed releases. Housing prints through summer have been both better and worse than expected, yesterday’s durable good orders release saw a rise of 22.6% versus 8% expected. This is a massive beat on expectations but once bulky orders of transport components are taken out orders actually declines .8% versus an expected rise of .5%. Data from the US is light with oil inventories and mortgage approvals due today, we may see markets take stock of recent moves ahead of tomorrow’s second release of US Q2 GDP.