GBP/EUR 1.3733 (0.7280)
Is was a tale of two halves in trading yesterday, during the European session stocks traded back from record highs and the EUR managed to rally higher against most major counterparts, boosted by some better than expected data prints. In the US session however stocks rallied, the S&P and Dow Jones Industrial Average both traded to record highs once again while the NASDAQ breached the 5,000 level for the first time in 15 years. The USD was marginally weaker on the day yesterday as its performance was mixed through the sessions with the USD index trading back from highs.
The positive risk environment failed to carry through into the overnight Asian session as stocks were mixed. AUD was an underperformer throughout yesterday’s trading session as analysts expected the RBA to cut rates by a further 25bps in last night monetary policy meeting but was an outperformer in overnight trade after the RBA failed to cut rates and took the market by surprise. Many had expected another rate cut from the Aussie central bank following China’s recent rate cut and previous comments suggesting the RBA would look to front run rate cuts, but despite alluding to further interest rate cuts down the road the AUD managed to rally higher.
The pound struggled for any meaningful traction through yesterday despite better than expected manufacturing PMI data showing the industry expanded faster than expected posting 54.1 vs 53.4. UK house prices fell and a decline in consumer credit and mortgage approvals also did not help the pounds case as it dropped back below 1.5400 against the USD. Construction PMI data is due for release this morning, with services PMI data due for release tomorrow. Last month Manufacturing, construction and services PMI data all surprised to the upside which helped GBPUSD bottom out and helped GBP drive GBPEUR to fresh 7 year highs. Given the fact GBP pairs took little solace from strong manufacturing data, we may well see this morning’s construction print overlooked as well, in favour of tomorrow’s services PMI print. EURGBP still remains below .7300, a break above should see the next level of resistance above .7350.
The EUR was firmer on the day yesterday following better than expected data from the region. Unemployment unexpectedly fell to 11.2% from 11.4% while the year on year CPI inflation reading only declined -.3%, versus -.5%, suggesting the pace of price deflation is slowing, while the core reading was as expected at .6%. Given the better data it was not surprising to see the EUR rally, we did say in yesterday’s commentary that upside surprises would provide more opportunity for the EUR but as expected the reaction was limited and we failed to claw back the ground the single currency lost after last Thursday’s heavy selling. Better than expected German retails sales released this morning have failed to provide any lift thus far and PPI data is unlikely to provide too much of a lift. Services data due for release tomorrow should provide a better picture while most focus will be on Thursday’s ECB meeting.
The USD was mixed through yesterday’ trading day after facing some selling through the early part of the European session the greenback found cause to rally early in the US session despite weaker than expected data. ISM Manufacturing was marginally weaker than expected posting 52.9 vs 53.0, while construction spending declined 1.1% versus .3% growth expected. Personal consumption was as expected but person income was only up .3% vs .4% expected, while personal spending declined -.2%. Despite huge positivity around the strong USD, I am still not seeing uniformed growth in the US and there are increasing signs the Fed will be taking a more cautious approach to hiking rates. Data is light from the US today but Friday’s labour market data will hold the key to USD strength for the next month.