GBP/EUR 1.2569 (0.7956)
Risk appetite remained suppressed through the European session, weaker than expected PMI data from the region led to investors selling risky assets and after several days of gains European equity indices bore the brunt of the selling pressures, despite the weaker data releases the EUR managed to hold much of its recent strength through yesterday’s session. The tone was a little different in the US, where better than expected US data and divergence in inflation readings between the US and its major counterparts saw US equity markets once again push to record highs, it must be noted that all these moves to fresh highs are occurring in miniature steps, the S&P rose .2% while the USD failed to find any reason to rally on the data points. In overnight trading the JPY was an out-performer, clawing back some ground on larger risk aversion and on comment from Japanese finance minister suggesting the decline in JPY has been too fast. The EUR has traded lower already this morning following a speech from ECB President Mario Draghi, inflation was the key topic in this speech and overall Draghi’s tone was notably subdued.
From a fundamental perspective there was very little to set the EUR alight through yesterday’s session, as we discussed in yesterday’s commentary the weaker than expected prints in manufacturing and services from France, Germany and the Eurozone as a whole does not bode well for the region’s growth prospects. I have been listening to Mario Draghi speak in one ear as I type this morning’s report and his tone is notably down beat, the EUR is certainly taking that stance and we have seen the single currency fall just under 1% so far this morning against the USD. Some comments that caught my attention focused on yesterday’s weak PMI reading, Draghi commenting that the weaker PMI readings suggest that a stronger recovery is unlikely. As mentioned inflation popped up in almost every other sentence and Draghi’s key point, the suggestion that if needed the “ECB would/could recalibrate the size, pace and composition (their) purchases as necessary to deliver (their) mandate”. These comments have understandably been taken as very dovish and the EUR continues to be under pressure across the board this morning.
GBP has had a couple of notable opportunities to look for some strength over the last couple of days, Wednesday’s BOE minutes confirming two MPC members continue to vote for rate hikes was deemed as a positive for the pound, while yesterday’s retails sales were also better than expected posting 4.6% versus 4.2% as expected. This helped GBPUSD trade back from 14 month lows to test back above 1.5700, while EURGBP has fallen back below the key .8000 area. The MPC are keen to point out that interest rate hike expectations will be data dependent and as such focus should be on the information coming from the UK economy, unfortunately for the pound with inflation expectations anchored and expected to decline, as well as the risk stemming from low Eurozone growth the outlook for the UK remains uncertain and this is putting pressure on UK rates and subsequently GBP.