GBP/EUR 1.2245 (0.8167)
The big event of yesterday was without doubt the ECB meeting, the policy announcements and press conference themselves were a rather dull affair but comments from Draghi indicating possible action as soon as next month sent the EUR sliding and boosted risk appetite in the Eurozone. European stocks rose for the first time in 5 days on the back of Draghi’s comments. In the US session stocks started the day on the rise but fell back from highs after the S&P failed to rally above recent record highs. The dollar had a mixed performance on the day, it lost ground to Asian currencies and other high yielder’s however the large drop in EURUSD did see the USD come out on top of the worlds most liquid currency pair and helped its performance over the day.
The ECB announcement and press conference was a pretty dull affair for the most part, President Mario Draghi pretty much copy and pasted his notes from last month’s meeting. The lack of action from the ECB saw EURUSD rise to 1.3993 during the early parts of Draghi’s speech, rates were held at .25% and no new unconventional measures meant it was “as you were” with the EUR. There was a couple of notable differences however which sent EURUSD, and the EUR tumbling.
Draghi commented that there was now “serious concern” caused by the high level of the euro and given they have already linked this to their inflation concerns they would seriously undermine their credibility if they continued to sit on the sidelines. This is where things got interesting, Mario Draghi said the ECB were “comfortable with acting next time” , but first they wanted to wait and see the updated staff projections on the economic and inflation outlook. This will lead into the June meeting with the markets positioning themselves for some ECB easing, for us we believe that if its not just further verbal posturing from Draghi it will be related to interest rates, either benchmark or deposit rates, with a QE liquidity injection style operation still on hold. EURUSD is down over 160 pips from highs and EURGBP finally fell back through the tough .8200 level to trade near annual lows just below .8160.
The USD played second fiddle to the euro through much of yesterday’s session. Better than expected weekly jobless claims got lost in the midst of the ECB press conference and the concluding day of Janet Yellen’s testimony to congress on economic policy offered nothing new. There were several other Fed speakers across the wires yesterday but none of them said anything material that would see the outlook for USD change. If the USD is to rally it needs a fresh catalyst, improving inflation or interest rate outlook would be a major shift, otherwise a traditional risk off move my lift the beleaguered greenback. Today’s calendar is unlikely to offer much change.
Despite a superior economy the BOE continues to be like a quiet little sister compared to the ECB’s fanfare. The MPC voted to keep rates on hold at .5% and made no change to their asset purchase target, as expected. GBPUSD was pulled lower alongside EURUSD but the pound did manage to pick up a swift 70 pips on the EUR as EURGBP broke back below .8200 from highs just short of .8250.
The pound has a little more to offer today however as we have a wave of event risks for UK Data releases. Industrial and manufacturing production figures are set for release along side Trade balance data, while the NIESR GDP estimate for April is due for release at 2pm. The Trade balance figures themselves have the ability to shape BOE rate expectations and strong production data will see speculation rise the BOE will have to act sooner then expected in raising rates. The big event however remains next week’s inflation report, and while today may not drive a fresh trend, it can contribute to a potential shift next week.