The Euro continued its decline through much of yesterday morning with EURUSD now down over 1.5% from the week’s highs, at one point yesterday we were 2% lower but some mixed US data weighed on USD and helped a moderate recovery in EURUSD in the afternoon. EURGBP was similarly under pressure, however rising trend support from mid-July which currently comes in just below .9200, appears to be holding up for now. GBPUSD was under pressure through much of the morning where despite the outperformance against the Euro, the pound struggled against the dollar before recovering through the afternoon as USD weakness took over post data helping GBPUSD back above 1.2900. European indices traded higher on the day once more, although it was another weaker month for stocks in Europe adding to the lull through summer, the old sell in May and go away adage seemingly apt for European summer markets this year. In US equities we face a different beast and the charge higher continues with indices now once again trading just below record highs.
Eurozone CPI readings were actually better than expected at 1.5% vs the 1.4% guided however it was rumors from the ECB that really weighed on the single currency. Reuters were reporting that ECB sources suggested that policy makers were concerned about the strength of the Euro and this may lead to slower tightening from the central bank. We’ve been suggesting for some time that the market has got too far ahead of itself, the 10% rally in the Euro was based on little more than speculation that the ECB would taper. It’s almost a carbon copy of the US taper tantrum that saw the dollar rally when markets waited for the Fed to scale back QE. The expectation was worse than the reality however and should the strong Euro cause risks to recovery then the ECB will be back to doing everything in its power. The big detail will have to wait until next week but we may yet see some Euro declines as traders cover gains ahead of huge event risk on Thursday. Manufacturing data for the region headlines the morning calendar but is unlikely to have a material impact on the Euro.
We have really had very little to say about the UK economy in recent weeks, there has been little in the way of major data, very little from the BOE and to be quite frank, the pound has really just been a follower against most other currencies. Brexit talks continue to ramble on and if we were to dedicate our morning commentary to the hot air and hyperbole that seems emanate from negotiations. I’ve had plenty of calls from clients asking why the pound is so weak (against the Euro), the reality is its not, it’s just the Euro is so strong. GBPUSD still trades over 6.5% above the post Brexit lows, GBPJPY is up over 17%, GBPAUD up over 13% and so on. The fact is the BOE are unlikely to move in any direction in the near future, close attention will be paid inflation but overshoot is expected for some time. UK data has been sliding but it’s still a way from the BOE reacting to it.
All eyes towards the US and we have a large amount of key data points once more. The NFP is the headline grabber with 170k jobs expected to be added however with a firmer print from the ADP earlier in the week, markets will likely be looking for something a little higher. We’d expect key USD pairs to cover ranges in the whip around post result but the USD is unlikely to shift its course unless the print is outside of the 150k to 210k range. The more important release in the labour market data in recent weeks has been hourly earnings, which are expected to grow to 2.6%, a weaker showing here and no matter what the NFP print is, the USD could face selling. ISM manufacturing and employment data will also see out the afternoon but the real USD direction will be judged on the NFP.