GBP/EUR 1.3780 (0.7257)
We highlighted yesterday that the USD was at breaking point and approaching key resistance against a number of currency pairs, with heavy USD selling seen against GBP, AUD and EUR to name just a few of the greenbacks most liquid counterparts. A weaker than expected GDP print was eventually the catalysts that broke the dollars back, sending EURUSD towards 1.1200, GBPUSD towards 1.5450 and AUDUSD towards .8100, and all this was before the statement was released from the FOMC meeting. Global GDP’s have been missing to the downside and two notable economies releasing advanced GDP’s this week, the UK and US, saw output slow significantly through Q1.
The result was a huge risk off move in markets, with global equities facing huge sell offs, in Europe equity market suffered one of the worst days of the year. A weaker bout of corporate earnings, the rising value of the Euro, marginally firmer German CPI and concerns on global growth saw indices plummet, with the DAX closing down 3.2% having posted record highs earlier this month. The overnight market has not been much better the Nikkei down 2.69%, the hang Seng down 1% and thus far almost all European stock indices have opened in the red once again.
Yesterday was not just a USD story but also a global growth one. The massive sell off in the USD is as a result of expectations firmly shifting away from a June interest rate hike from the Fed. Our regular readers will be aware we have been highlighting a slower Q1 in the US since early February, while also pointing out the implications global growth trends will have on Fed policy. Yesterday’s Q1 print, which is just the advanced reading and will be subject to several revisions, saw Q1 growth decline .1%, dragging the annualised rate down to .2%, from 2.2% at the end of Q4 ’14. This weak print saw accelerated USD selling which drove the USD through key technical levels and resulted in even larger selling.
The FOMC statement was slightly more dovish than previous statements, as expected, they also removed any wording relating to the actual timing of a hike but continue to point towards it being data dependent. Q1 historically has provided far weaker outputs levels and even with seasonality accounted for this is something the Fed are now looking at. I would expect to see US GDP pick up pace through the year, with upward revisions to the Q1 print in coming months. For now however the USD is out of favour, and while the Fed are likely to still be the first major central bank to hike rates, timing is now under even greater scrutiny. Today s focus will be on the personal Consumption Expenditure rate which the Fed use as their real barometer for inflation, due to remain unchanged at 1.4%. Weekly jobless claims will also be under scrutiny.
The weak bout of global data and a depreciating USD is the very last thing the ECB would want to see having just embarked on their large scale QE program. EURUSD has appreciated close to 7% from April’s lows while European indices plummet. We have seen some signs of bottoming out in Europe and the reality is the Eurozone Q1 growth will likely eclipse both the UK and US. Now obviously the region is coming from a very low ebb and again growth is on the back of considerable easing from the ECB, with negative interest rates and a €1.1 trillion QE program under way. In the shorter time scale better Eurozone is unlikely to knock the ECB from their current policy route, certainly not this year. The EUR has continued higher this morning on better than expected German retail sales. Italian unemployment rising to 13% from 12.7% has gone unnoticed thus far and all eyes will now be on Eurozone CPI readings with inflation expected to have been at 0% year on year through April. EURUSD could go as highs as 1.1450/1.1500 should USD negativity continue, but we still see these high levels as opportune times for EUR sellers looking to put in hedging for buying USD.