GBP/EUR 1.3813 (0.7237)
Last week closed off very much on trend with weekly activity, stock markets were in the green as was the USD which extended its gains against GBP and EUR amongst other currencies. The EUR continued to face selling pressures closing off five days of consecutive declines against the USD, down 4.25% from the post non-farm payrolls highs in EURUSD. The USD was stronger across the board with the USD index climbing on the week but notably falling short of its March highs above 100. GBP struggled against the advancing greenback, while election uncertainties continue to play their part in hampering any GBP advance, with indices suggesting GBP uncertainty has not been as high since the Scottish referendum last year.
Overnight weak Chinese trade data has seen AUD and NZD underperform in FX markets, Chinese data showed exports slumped 15% year on year in March, versus a 9% increase expected. Needless to say a slowdown in activity from their largest trading partner can create significant headwinds for both the New Zealand and Australian economies, where both central banks are already on an easing cycle with the potential for further rate cuts. Stocks in Asia advanced despite the weak data, most likely on the prospect of additional easing and stimulus measures. Most European markets have opened lower this morning along with the Euro which is continuing it’s downwards trend from last week. We have a quiet economic calendar today but larger risk appetite will likely dictate direction in major markets so Q1 earning season will factor into FX moves, while later in the week we have some major economic and central bank releases, which will likely stoke FX markets.
Last week’s stronger USD trend was on the premise that the slowdown in the US economy is only temporary and that despite the last FOMC statement telling markets to focus on the data, bullish comments from Fed members has once again seen speculation return the US will look to raise rates as soon as June or September. GBPUSD broke through notable support last week opening up the potential for further downside in the pair, however I feel this is one of the most undervalued currencies having fallen over 15% since June last year. The US and UK economies still appear on similar paths economically and while the BOE have been a little more vocal on inflation concerns, other areas of growth remain relatively robust. Interesting for the USD will be earnings releases, further indications the overly strong USD is impacting US earnings could well see calls to address the surging value of the greenback, which could see rate hikes pushed further down the line.
As mentioned GBPUSD appears to be considerably undervalued having fallen over 15 % in less than a year. While the uncertainties around UK elections are playing their part, the next thorn in the side of the pound is the inflation outlook. With that in mind UK CPI inflation data due for release tomorrow will be in firm focus. Later in the week UK labour market data and wage growth will be in focus, signs of rising wage growth and improving labour market will go a long way to lifting GBP , but until the election outcomes are known, the pound is likely to struggle for meaningful traction against the USD.