GBP/EUR 1.2147 (0.8231)
Friday’s better than expected Eurozone CPI inflation release lifted the single currency as the core reading rose to 1% from .8% expected. The apparent relaxing of deflationary pressures coupled with better than expected retail sales figures from Germany lifted the mood in Europe going into the weekend. This has waned somewhat as geopolitical concerns have seen sentiment shift as concerns rise on a Russian military presence in the Ukraine. Concerns about a further escalation in the Crimea region and broader Ukraine has seen stocks lower, JPY, gold and US treasuries have all moved higher indicating the larger shift to a risk off environment.
Risk sentiment is likely to ebb and flow until we receive further clarification on what is happening in the Ukraine, but as it stands Russian markets are lower, as are closely linked EM markets and currencies. The fallout has carried through into the European session with equities sharply lower this morning also. We will off course be keeping an eye on events in the Ukraine, often the initial reaction to these events is to the extreme and tends to reverse quickly, but obviously should we see any escalation expect larger risk off trends to develop. In the meantime we have an active week on the fundamental calendar so that’s where our primary focus will be.
Looking at the Eurozone first, the faster than expected rising pace of inflation for February reduces the potential for the ECB to ease rates or bring in any new non standard measures at Thursday’s meeting. The rebounding inflation rates fits very nicely into the ECB’s current policy, as they mentioned in last month’s meeting they are waiting to see the effects of the previous rates cuts filter through. Typical time frames for such effects to filter through would be approximately 6 months, with the last ECB cut in November.
Aside from the ECB on Thursday we should get further indications on Eurozone health from PMI data, with manufacturing figures due for release today, and services data due on Wednesday. The February readings for both are expected to remain unchanged from January. Retrospectively we also have Q4 GDP due from the region on Thursday.
The big question in the US remains the validity of the recovery. If February markets were an indication the pace of recovery has slowed considerably in the US and we are likely to see the Fed remain accommodative for a prolonged period, in essence the market has little faith the current pace of tapering will continue. This is almost the opposite to the situation in the UK, the Fed are saying tapering will continue, the BOE are saying rates will not be rising any time soon – the markets appears to trust neither guidance judging by respective currency performance.
Friday’s Non Farm Payrolls will likely be used as the barometer to judge Fed actions for March. Today we have ISM manufacturing data due, expected to show a small rise in February.
The BOE are unlikely to change their agenda in Thursday’s meeting, so instead we will be looking at PMI data releases for an indication in UK economic health. As we have been keen to point out both December’s and January releases for Manufacturing and Services PMI missed to the downside. Should we see a continuation of this trend we would expected to see some downward revisions of UK Q1 GDP. First up is this morning’s manufacturing print.