GBP/EUR 1.1824 (0.8454)
Yesterday we saw a return to the traditional market risk off environment. Stocks in Europe were generally mixed with the Dax and CAC up .3 and .6% respectively but that is where the positivity ended. The FTSE struggled down .7% as did many of the Nordics and the US session finished lower as the post FOMC hangover saw demand for stocks muted. Weak data from the Eurozone put the single currency under pressure and saw increased calls for ECB action as the USD reigned supreme as it continued a 5 day rise.
Despite the strong Euro over the last few months we have been continuously warning of underlying weakness in the region, below target inflation and weak unemployment leave the Eurozone very vulnerable and make any real growth very difficult.
With that in mind we had a perfect storm of concerning data, with CPI, the benchmark inflation reading falling to a four year low of just .7% versus an expected 1.1% (YoY), still a long way off the ECB target of 2%. Unemployment for the region hit a fresh record high at 12.2%. Anaemic growth and persistent price pressures leading towards deflation raise the probability that the ECB will be forced to act to support the region, this leaves the Euro vulnerable into next week’s ECB meeting.
EURUSD fell over 1% yesterday and the slide has continued overnight and into this morning with traditional safe havens the USD and JPY regaining their crown in nervous markets. The slide in EURUSD was the biggest single day decline in over sixteen months but be cautious, this was not all a turnaround towards USD strength going forward, and the US will remain vulnerable to data, further indications of weakness will put the USD on the back foot once again. Any data supportive of a taper before March ’14 should however see the greenback well supported.
Data from the US was mixed in itself yesterday, jobless claims were marginally higher than expected at 340k versus 338k, however the tone was lifted by a stronger than expected Chicago PMI posting 65.9 versus 55 expected. Today’s US data will be key into the weekend with Markit PMI expected, the ISM manufacturing due to show 55.1 down from 56.5 last month. This may halt the dollar’s run.