GBP/EUR 1.1951 (0.8368)
Stocks in the overnight session shrugged off weak Chinese PMI data as Asian markets showed gains with the Nikkei in Japan rallying over 2% on its return from a holiday. Risk was well supported as shown with equity gains, as safe havens JPY,USD and gold all experienced declines overnight. Russian military action in the Ukraine and subsequent sanctions has yet to have any major impact on markets, certainly not from a fear perspective.
After a quiet week on the Eurozone front, the single currency should have a bit more data this week to provide some direction. Kicking off this morning we have flash services and manufacturing PMI’s. The pace of Eurozone manufacturing and services growth was due to have declined for the first time in four months but French data released at 8.00am was far stronger than expected, which may lift the Eurozone figures, that being said the key German figures were marginally weaker and may carry more sway. Should the Eurozone composite figures decline as expected we’d expect to see a weaker Euro as fresh stimulus bets weigh on the single currency.
French Services PMI posted 51.4 vs 47.5 expected at 47.2 in February, with Manufacturing coming in at 51.9 vs 49.7 expected and 49.3 prior. This huge jump lifts France from a contraction phase into expansion, with the Composite PMI reading at 51.6 vs 47.9 in February, at 31 month highs. Despite the good numbers from France political developments have been less favourable as Francois Hollande and his party were stunned by over whelming support for the far right National Front in municipal elections, gaining their first mayoral seat since 1995. Hollande’s presidency has not proved popular in its first two years and a return of political instability can only hamper the French recovery.
The USD rallied from close to five month lows last week as the Fed signalled their intent to continue with the pace of tapering and indicated rates would be rising sooner than markets had currently been pricing. We have yet to see belief in the guidance via real markets rates but should US data continue to improve from the low base set through December and January. Markit PMI data is the only major release of the day from the US but later in the week home sales data and durable good orders are likely to provide a better indication of confidence in the recovery.
GBP has been on the back foot as the BOE continue to discuss spare capacity in the economy. The calendar is quiet today but tomorrow’s CPI inflation reading may well see fresh GBP selling as the headline year on year figure is due to decline to 1.7% from 1.9%, although the core reading is due to remain unchanged at 1.6%. The BOE’s inflation target remains at 2% so should we see continued consecutive months below this level we would expect to see the interest rate outlook deteriorate.