GBP/EUR 1.2324 (0.8114)
As it has been well covered over the past several days, we won’t dwell too much on the big event of last week, the ECB meeting and its subsequent announcements. However, it is important to highlight this morning, the lack of impact on the value of the euro. Typically, you would expect to see the euro weaker than it is – remember the initial post ECB market reaction was to sell the euro, with EURUSD hitting a 1.3506 low and EURGBP c.8065. However, when you dig into the detail of some of the measures, some of the key ones are more medium and long term in nature, so any currency deprecation will take time. For example, the Targeted Long Term Refinance Operations (TLTRO) aimed at enhancing SME financing is not due to start until after the summer and mature September 2018. Also, last but not least, the ECB announcement that they will “intensify the preparatory work related to outright purchases in the ABS market”, is the closest to a ECB form of Quantitative Easing and so the one most likely to impact currency deprecation. However, we are still a long way off from such a program being implemented with some analysts predicting a 2015 start date.
So all in all, the ECB didn’t go for any knee jerk reactionary measures and as ever the calming influence, Draghi seems to have implemented a more medium term looking program with plenty of more measures to be announced as he sees fit, in his fight against deflationary pressures. As a result, the single currency remains very much unchanged versus its peers this morning with EURUSD trading in a 1.3641 to 1.3669 range and EURGBP .8118 to .8129.
From Friday, the key release from the US was May’s Non Farm Payroll with a 217,000 new jobs reading marginally beating average consensus of +215K. In addition, the unemployment rate remained unchanged at 6.3% versus expectations of a drop back to 6.4%. As a result, equity markets generally rallied and closed higher on Friday, as recent employment data from the world’s largest economy suggest a strong rebound in production activity.
So both key events from last week were supportive of risk sentiment with markets and Emerging Market currencies all feeling good about themselves. As a result, attention will now turn to this month’s US FOMC meeting on June 17/18. Again market consensus is for further tapering of $10bn, split 50:50 between Treasuries and MBS. The key focus will be on the nature of the debate around QE exit strategies and whether a rate increase is on the cards before or after the end of tapering.
Before then, this week is a very quiet one on the data front with little or no releases of note to report in the earlier part of this week. From a currency perspective, expect recent ranges for the euro to remain with new lows potential off the cards for the moment. Interestingly, GBPUSD has been trading upwards into higher ranges over the past few days moving back into the 1.68 territory but continually failing to attract any interest beyond there, so a move above of 1.6900/1.6920 is needed before it can test recent highs.
Have a good week.