GBP/EUR 1.3807 (0.7242)
Risk was somewhat more tentative through yesterday. The European trading session started with some better than expected German retail sales, but that did little to support Eurozone stocks or the EUR which slipped against the USD and GBP amongst others. As Eurozone yields continue to fall expectations of 2015 rate hikes have been supporting the pound and dollar, with interest rate differentials widening, the Euro has been struggling against its major counterparts. Stocks in the US also traded lower on the day, back from record highs in the S&P and Dow and 15 year highs in the NASDAQ, the USD index did trade to fresh 12 year highs before pulling back and closing the day lower than its open. We have spoken about central banks front running interest rate cuts, perhaps lessons have been learned from the ECB, but other major central banks have been catching markets by surprise and cutting rates earlier than expected, we saw it from the RBA in Australia and the PBoC in China, now the RBI in India has front run markets and cut rates by 25bps. While this may have relatively limited impact on major currency crosses it does highlight the concerns on slower global growth and the disinflationary/deflationary environment that is prevalent across the globe at the moment. There are several other central bank meetings this week including the ECB and BOE, although today’s Canadian rate decision may carry the strongest ability to surprise, as last month they were another central bank who caught markets off guard and cut their benchmark rate.
The EUR has been under pressure all week and any rally higher has found the single currency running into selling. EURUSD has already broken back to fresh 6 week lows this morning, next support down comes after the post ECB QE announcement lows in late Jan, just below the 1.1100 mark. The big question at the moment is how well has the market priced in the ECB’s QE program and future ECB policy. Despite some signs the Eurozone’s fortunes are turning the impact of the ECB’s QE program will take some time to filter through, there will also be a revisit to the Greek situation in 3-4 months which once again will stir some EUR volatility. All eyes will be on tomorrow’s ECB meeting and for now the EUR continues to look vulnerable, but more importantly is there has been a lot of weakness already priced in, added to significant strength priced into some of its counterparts, most notably the USD, should outlooks change we could see a sudden reversal of recent EUR declines. Markit PMI data from the Eurozone headlines today’s Eurozone releases but as with all Eurozone releases this week, any follow through on the prints will likely be limited with the ECB due tomorrow and QE about to begin we will be looking for additional details on the program.
Services PMI data headlines today’s UK economic calendar and despite yesterday’s construction PMI beating expectations, joining manufacturing PMI in beating analysts’ predictions for the second consecutive month, the pound still struggled for any meaningful headway. The BOE are due to meet tomorrow for a policy meeting, but no change is expected from them and as such we do not expect to see a statement or press conference. This really makes the policy meeting a non-event, the BOE have been steadfast in saying that their next policy step will be tightening not loosening, UK data continues to beat expectations and aside from lower inflation the UK economy appears in good health. This brings us today’s services PMI print, one of the largest inputs to the GDP figure, services data last month was better than expectations and is expected to have risen again from 57.2 to 57.5, a better than expected result here could well see GBP rally on pent up good will as it has failed to find buyers despite consistently favourable economic data. Needless to say, given good news has seen selling, a weaker than expected PMI release could well push GBPUSD back towards 1.5200. EURGBP has been falling and is once again looking to break to multi year lows following poor PMI data from the Eurozone.
The USD index reached fresh highs again yesterday but failed to hold them. That is the third consecutive day the USD has failed to follow through on a break higher and with all eyes towards Friday’s Nonfarm payrolls where we are sure to get a breakout one way or the other. Payrolls have been amongst the most consistent data from the US in recent months averaging in excess of 230k jobs added to the economy per month, with this month expecting 235k. Only anything below 200k will really impact the USD’s current trend higher. With that in mind, today we will be looking towards the ADP employment report for any indication jobs growth is slowing. We also have the ISM non-manufacturing print for release and later in the evening the Fed beige book on economic activity will give us a run-down of the US economy. USD remains poised to break either way, only a catalyst is required.