GBP/EUR 1.2077 (0.8277)
The “year of the Dollar” has certainly not got off to the start many had anticipated and the Euro has continued to reign supreme in 2014 with EURUSD breaking to fresh 2.5 year highs. The ECB yesterday made no change to their policy, there was only a slight possibility priced into the market that the central bank would cut rates further but the rally in Euro on essentially no change put the USD under severe pressure.
The USD index, which measures the greenback against a basket of currencies broke down through critical support indicating further losses could lay ahead, should today’s Non Farm Payrolls provide a third consecutive downside surprise the USD may have had its day. Equity markets in Europe remained relatively unchanged on the day as US stocks rallied, most notably the S&P 500 closed at all time highs. Asian equity markets followed the lead higher overnight and AUDUSD broke through key resistance to fresh 2014 highs.
The major event of the day was the ECB policy announcement and as expected the ECB opted for no change. There certainly appears to be an air of frustration out there surrounding the ECB’s lack of action but they are happy to stick to their mandate and maintain price stability. They echoed the previous statement that they see no deflation concerns, with disinflationary pressures easing.
That being said they still see inflation well below target by 2016. The ECB’s lack of action provides strong validity for EUR strength. The ECB balance sheet continues to contract, unlike most major CB’s (particularly the US), the risk of a Eurozone breakup is a distant memory and capital flows to the region have supported peripheral bonds. Growth may stagnate and we may be entering a period similar to that experienced by Japan but for now, without the threat of ECB action the EUR can remain supported.
The BOE was once again a damp squib, and as expected there was no change in BOE policy. The usual applies here and we will have to wait for the minutes to be released in two weeks before we get to gauge the tone from the BOE. For what it’s worth they have remained consistent in their view and rhetoric that they see no need to raise rates in the near term, the pound has shown some signs of fading, however the 10 year gilt yield curve jumped yesterday, closely followed by a move towards 1.6800 in GBPUSD- the pound may not be finished yet.
The US is providing markets with many mixed signals. Data continues to be impacted by poor weather, factory orders down .7%, non farm productivity falling to 1.8% vs 2.2% and today’s jobs figures will provide a huge test for the greenback. Despite the weaker data from the US however stocks continue to rally, it is difficult to separate a real risk positive environment from one that is being artificially inflated by the prospect of continued easing.
From the Feds standpoint they have a high tolerance for weaker data and aim to continue the pace of tapering, that’s what has been said in public so far but today’s NFPs are likely to be a deciding factor. A print of 155k is expected, anything sub 120k is likely to start a fresh bout of USD selling.