GBP/EUR 1.2183 (0.8208)
Markets have remained mixed over the last 24 hours, both European and US stocks saw gains as earning results helped lift risk appetite, however this mood failed to carry through into the overnight session as Asian stocks ebbed between gains and losses. The Euro was one of the biggest losers of the majors as German inflation data missed to the downside. The USD was marginally firmer on the day, the USD index trading marginally higher boosted by dollar gains against the euro, while GBP held firm despite GDP coming in below estimates.
There was plenty of data on the calendar yesterday one of the highlights of the morning session was the Q1 UK GDP release. The pound initially faced selling pressures as the figure of .8% growth through Q1 and 3.1% growth year on year fell short of estimates at .9% and 3.2% respectively. GBPUSD fell 50 pips from near highs back below the 1.6800 briefly before regaining its footing. We’ve spoken of the pounds vulnerability to shocks and that 50 pip decline was evidence of the good news priced into sterling crosses.
The bigger picture for the pound remained unchanged however. There were plenty looking for a GBP breakout, especially vs USD which still trades near multi year highs, but yesterday’s GDP release does little to change the interest rate outlook. The economy is still growing in excess of 3% year on year, with growth rising from Q4 ’13 to Q1’14. The data calendar remains light from the UK and pound selling was halted on yesterday’s German inflation figures.
The pound got a reprieve yesterday after struggling with losses for much of the morning, attention was quickly taken away from it as the flash German CPI print was weaker than expected stoking calls for ECB action. Following a morning of weaker consumer confidence data the .2% decline in German flash inflation brought the EU harmonised figure down to 1.1% year on year from 1.3% expected.
This is outright deflation for Europe’s core through April and has seen expectations lowered for today’s Eurozone wide release. Bank lending to the private sector declined through March, as did money supply growth in general. These are not numbers the ECB would want to see and certainly would suggest the time for them to act is fast approaching. They remain vocal that they see no deflation concerns in the Eurozone, despite their obvious attempts to talk down the value of the Euro.
There has been some good news from the region in the form of the Spanish GDP release, confirming yearly growth of .4% through Q1. A huge miss for German retail sales however has meant the EUR has remained flat on the day so far, high street sales declining 1.9% versus 1.7% growth expected. The bigger releases of the day will be German Unemployment and the CPI print for the Eurozone. Expectations are for a 1% growth print anything on the low side will once again see the EUR under selling pressure.
Later in the US session the focus will be on the release of Q1 GDP figures for the US. Growth is expected to have slowed to 1.2% through Q1. We are well aware of the “weather effect” that has been used as an excuse by many but this cannot take away from the fact that it has still hampered recovery. The concern is that this print will see the Fed change their guidance on interest rate policy, as it stands they are looking to maintain their zero interest rate policy into 2015, any indication from tonight FOMC that this has changed may well put the USD on the back foot.
We still believe that the Fed will continue with their pace of tapering QE and reduce asset purchases by a further $10 bln per month. Janet Yellen also speaks later on the Economy, we have heard little from Fed commentators over the last couple of weeks so traders will be looking for any indications on their take on the current state of the US economy, post Q1.