GBP/EUR 1.2570 (0.7954)
Monday may have started the week with markets showing some signs of uncertainty, yesterday’s performance showed far more conviction and global risk was well supported following the firm Chinese Manufacturing PMI reading, providing markets with some assurance that Chinese policy has halted a potential slowdown. Equities in Europe and the US followed the Asian session higher through Tuesday, with European stocks rallying the most in two months, while in the US, markets were once again looking towards fresh highs with the Dow almost reaching 17,000 for the first time. The USD once again suffered losses, led overnight by AUD and then through yesterday’s session GBP took control. In overnight trading the Aussie gave back some of the ground gained through Tuesday as they reported a wider trade deficit.
The good will behind GBP is an unstoppable force at the moment, we mentioned yesterday that weaker data has been ignored and has had little impact on sterling crosses so little surprise to see a GBP rally when manufacturing PMI’s for June posted 57.5 vs 56.8. GBPUSD rallied above 1.7100 with highs above 1.1750 posted during yesterday’s session. There was little attention paid to a warning from the BOE that the market is underestimating the possibility of tail risks. This is the same warning the Bank of International settlements gave over the weekend, citing financial markets are complacent, which could lead to risky market conditions.
The huge jump in GBPUSD occurs as the spread between swap yields reached its widest since 2010. The pound may still have some fire left today as we expect PMI construction data, due at 9.30. Construction growth is expected to have slowed to 59.8 from 60, this is due to be the 5th consecutive month showing a contraction in the pace of construction growth, on a technical front both GBPUSD and GBPEUR are both showing overbought signals, we may see good cause for a reversal should data support some profit taking on recent GBP moves.
The recent rally in the EUR has come from demand for yield, the single currency has derived much strength from investors looking for apparent value in undervalued assets across the Eurozone, and the last couple of days have provided further evidence of this with yields in peripheral bonds falling as demand surged. There have been some signs of fatigue and there are certainly some questions being asked when Spanish debt is priced comparable to US debt on risk/yield terms.
Today’s calendar remains quiet through the European session but this is the calm before the storm. Tomorrow we have Services and Composite PMI data for the Eurozone, along with retail sales, followed by the ECB meeting at 12:25. We are certain of EUR volatility but the earlier releases may well be ignored with expectations building for the ECB policy release. There is no expected change on rates or deposit rates for that matter, and we do not expect the ECB to announce their QE program just yet. Traders and the market will be looking towards the press conference and ECB rhetoric on possible QE mechanisms and timing. The EUR has underperformed in the last 24 hours on these expectations.
The USD has remained under pressure this week but a host of data to support the greenback is expected to start today. The ADP employment print is often used as a barometer for the Non Farm Payrolls and although there is often little correlation with the number printed the general trend in employment can’t aid those Non farm Payroll predictions. The ADP report is expected to show 205k jobs added to the US economy through June, anything in line of better should provide a lift to the USD ahead of tomorrow’s Non Farm Payrolls.
Another point to note is Fed Chair Janet Yellen is due to speak to the IMF in Washington this afternoon. The USD has suffered every time Yellen speaks as she obviously favours a low interest rate environment to support growth and jobs. Markets will be looking for indications of rate hike timings, especially with QE3 due to be wound up by September/October. USD strength for the second half of the year will depend how quick tightening occurs once QE is finished.