GBP/EUR 1.2605 (0.7933)
Yesterday’s data calendar was light and as discussed market appetite was dictated by Q3 earning releases. Weaker than expected financial results sent European stocks lower once again, European markets are facing further declines this weak as they suffer their worst rout in over a year. Weak earnings reports set the tone for Europe and markets traded in the red with the CAC down 1%, the FTSE down .7% and the DAX down 1.5%. The tone was different through the US session but a positive shift in equity markets did not see an all-out return of risk appetite. Equities were led higher following better than expected earnings from Apple, but there was some high profile misses, most notable from IBM which dropped 7% after an uncertain outlook. A stronger JPY in overnight trading saw Asian markets trade mostly lower, despite better than expected Chinese GDP which had little impact on Asian markets as a whole. The JPY closed the gap on USD after the greenback started the week with a positive tone. Demand for the USD did not last long however and the USD was under selling pressure against most major counterparts, losing ground against EUR, GBP, JPY, AUD and NZD to name just a few.
The Euro traded firmer on the day against USD, while losing ground to GBP which was a quiet out-performer on the day. A spokesman confirmed the ECB has entered the market to purchase assets as part of their covered bond/ABS program, details of which were provided in the last ECB meeting. The sticking point on this program is the targets and size of the program remain unknown, the lack of detail has resulted in a recent relief rally for the EUR, as markets were somewhat disappointed with the ECB’s ambiguity on the issue. Reports would suggest that the ECB bought short term French and Spanish securities yesterday although that net will likely widen. As long as the Eurozone continues to struggle with inflation and growth, pressure is likely to remain on the ECB to act accordingly, this can only put further downward pressure on the EUR so we do not believe recent EUR strength is a reversal, simply a slight correction before a further move lower. Eurozone data continues to be light, Government debt to GDP ratios are due for release but unlikely to have to great on impact on EUR trading.
GBP was firmer across the board yesterday as it enters a week with several key data points. GBPUSD traded back above 1.6100 while EURGBP managed to hold below .8000 with a test towards .7900. GBP and USD are both trading on interest rate expectations, both central banks have seen prospects of rate increases pushed back to later in 2015 as the global slowdown impacts policy decisions. With policy in mind we will be looking towards tomorrow’s release of the BOE minutes from earlier in the month. The last couple of months have seen two members vote for rate increases, while the remaining 7 members of the MPC remain happy to keep rates on hold for now. Last week’s low inflations prints from the UK caused me some concern, MPC members would likely have had a good handle on inflation expectations by the time they met to discuss policy, with inflation well below target I find it difficult to see any further members changing their vote to hike rates. If anything I am cautious to the downside for GBP, both the IMF and Fed have warned on slower global growth expectations, if the BOE take a similar stance it is likely to be taken as a dovish move, especially with their close proximity to Eurozone woes.
The USD appears to be taking a breather, we have now seen two weeks of greenback declines following 13 straight weeks of an advance. It makes sense the dollar couldn’t rally indefinitely but we have yet to see any aggressive selling either, the question now is, is the USD just taking stock of its current position or have we seen a notable shift away from USD strength. On the fundamental side US data points to a mixed pace recovery, and recent concerns on inflation and global growth have seen many pull back rate hike expectations for the Fed. This obviously has resulted in some USD selling. Global risk has also taken a knock on the weaker outlook, this would usually play into the USD’s hands, and we have seen some safe haven demand support the dollar but over all its performance continues to be mixed, with weight to the downside. Later today we have US housing data, existing home sales are due to rise 1%, housing releases have been very mixed month on month and sector by sector in the US so difficult to gauge greater impact on the USD. Overall risk appetite is likely to continue to lead markets so earning releases once again will take focus, if home sales data is on the topside of expectations we may well see a USD rally on a better risk environment.