Risk was well and truly off in yesterday’s session as stocks across the globe tumbled, with the exception of the UK’s FTSE which bucked the trend and was helped by a rally in bank and mining stocks. In fact, the UK was one of the few shining lights in yesterday’s session as GBP continued its press higher as a result of Carney’s hawkish twist on Wednesday. The DAX traded to fresh 12 month lows, the Stoxx 600 hit two month lows down over 1.2% while the Euro also struggled to advance on its recent gains, although the single currency did managed to range near recent highs against majors.
In the US session, stocks dropped from the open while the USD index also traded lower as expectations for further US rate hikes this year diminishes as inflation and growth concerns in the US begin to weigh on policy outlook from the Fed. Overnight in the Asian session stocks remain heavy with the Nikkei down over 1% while the JPY, which has been under selling pressure all week, finally managed to get some traction as the larger risk aversion theme overtook the lack of hawkish commentary from the BOJ.
The Euro has been well bid all week on market interpretations that Mario Draghi is now more hawkish and will look to scale back easing. We keep having to go back to this and we’ve highlighted all year, that there is no doubt the ECB will begin to discuss scaling back easing, but is now the right time? The thing is some participants may only hear what they want to hear to justify their argument. There was certainly a shift in language as he highlighted reflationary concerns vs deflationary, but he also highlighted the key importance of easing to maintain stability in the region and a willingness to increase, extend and do whatever it takes, if necessary.
Key for the Euro today will be the release of Eurozone CPI, while the Euro held firm on a better German print yesterday, expectations now for the regional print are higher, perhaps setting the Euro up for some downside should the figure disappoint. This are the flash figures for June, and the headline reading is expected to show inflation dropping to 1.20%. Given the lack of drive on the Euro yesterday, despite strong German inflation readings, the market may well be looking to get the regional figure out of the way, before looking to take profit on recent moves higher, especially as we enter month and quarter end. Euro remains in overbought territory, and indicators continue to signal the possibility of a pull back as divergence grows between price and strength.
GBPUSD has found itself back above 1.3000, while EURGBP is under pressure from the stronger pound but also as Euro weakness begins to slip in this morning. GDP figures from the UK headline the morning calendar from the UK and as the pound hold firm, estimates re expected to confirm .2% growth through Q1, and 2% year on year. Given the recent shift in BOE rhetoric, and a steady flow of improving data from the UK, any surprise to the upside should provide GBP with another leg higher and EURUGBP will be looking to break back down towards .8640/50 area. While GBPUSD will be looking towards recent highs around 1.3040, although there are plenty of GBP sellers above 1.3000 and we’ve seen a steady flow of hedging this week on recent highs in GBPUSD.