GBP/EUR 1.2241 (0.8169)
The EUR and GBP have started the day on shaky ground as ramifications from central bank policy threaten their recent 2014 strength. Yesterday’s BOE inflation report saw a slightly more dovish stance taken than much of the market expected and certainly not on side with interest rate markets pricing a rate increase before year end. The EUR has carried its own troubles from this month’s ECB meeting, further talk yesterday that the ECB were preparing an easing package knocked the single currency while the USD has remained firm and is testing the USD index resistance. Equity markets performance was mixed, in Europe and the US, stocks traded back from recent record highs albeit still at firm levels.
Yesterday’s big event was the BOE’s inflation report and subsequent press conference. All week we have warned that markets were essentially pricing in perfection for the UK economy and their interest rate outlook, which left GBP vulnerable to selling. We saw just this as the BOE’s inflation report was more subdued than many were looking for. The BOE still see spare capacity in the economy to the tune of 1-1.5% of GDP. Overall Carney and Co were relatively positive on recovery with optimistic projections for growth.
The problem is that markets wanted Mark Carney to put a date on a rate increase, what he did was emphasise that the BOE would not raise interest rates to tackle concerns of a housing bubble, instead other measures would be introduced. The Jobs report saw unemployment drop to 6.8% from 6.9% but again the underlying figures were less positive, with wage growth remaining at 1.7% versus 2.1% expected. The UK economy is certainly heading in the right direction but for now the BOE appear content to leave policy on hold, we don’t see any tightening this year with rates expected to remain at record lows for a prolonged period. The Pound declined against USD falling back to 1 month lows this morning, while EURGBP pulled back from 1.5 year lows, but still trades below the .8200 level.
Last week’s reaction to the ECB’s “comfortable to act in next meeting” comment saw reactionary selling in the EUR as markets rebalanced their expectations. Monday saw EUR pairs remain in consolidation but what has been telling through the rest of the week has been the continuation of EUR selling. EURUSD has fallen back to one month lows below 1.3700. A day has not gone by this week without some comment in support of ECB action, from the Bundesbank to ECB members. Rumours the ECB were preparing a package circulated through markets yesterday and worse than expected CPI readings from Italy and France have not helped the situation.
This morning brings both Eurozone GDP figures and the composite CPI reading for the region. The core year on year inflation figure is expected to remain at 1%, while Q1 GDP is expected to come in at .4% versus .2% in Q4, with year on year GDP growth at 1.1%. Anything on the low side in either release will see accelerated EUR selling into the end of the week.
The USD has been quietly going about its business this week, data from the US has remained mixed, retail sales disappointed early in the week yet yesterday PPI inflation data suggested price pressures were growing in the US. The greenback has benefited from the slip in EUR and GBP over the last week but interest rates tell a different story. Yields continue to fall in treasury notes and we’ll need to see a shift in the rate outlook if the USD is to truly reverse its 2014 bear trend. Today’s CPI reading may provide just that, the main figure is expected to show inflation at 2%, up from 1.5%.