GBP/EUR 1.3870 (0.7208)
Fear was a more dominant theme in markets yesterday, Greek concerns were to the forefront of the European session on renewed concerns a default is coming closer after reports suggested Greece asked the IMF for a delay on their repayment of €747m due on May 12th. The IMF reported it had refused an informal request for an extension and the resulting surge in Greek bond yields reflected an increased probability of default. Stock markets bore the brunt of fear selling while the Euro actually managed to hold its own against other major currencies. US stocks followed European markets lower and the USD was also on the back foot as once again the majority of US data failed to meet expectations, although there were a couple of data releases to the upside. A bout of Fed speakers in the afternoon provided the usual mixed signals on the timing of rate hikes as each voiced their view. In overnight trading the USD remained under selling pressures, the JPY advanced as Asian equity markets sold off, driving demand for the safe haven yen, while AUDUSD continues to try hold above .7800.
It has been a relatively quiet week on the UK data front since Tuesday’s Inflation reading but GBP has managed to push EURGBP sub .7200, with resistance to the topside just above .7220 and lows are supported just below .7165. While GBPUSD is also testing the topside of its pre-election range with a move towards 1.5000. While we have yet to see any clear GBP strength, weakness in its trading partners is providing opportunity for the pound to advance. UK Jobless claims data headlines the economic calendar in the European session and Unemployment is expected to drop to 5.6% from 5.7%, with average weekly earnings growth up 1.8% as per last month report. This is very much on trend with GBP data and in the very near term unlikely to have a major impact on BOE policy but will certainly provide enough support for the pound to hold off any rapid declines. The minutes from the BOE’s April meeting are due next week, and should provide us a better insight into the thought process within the MPC.
The Euro has remained firm despite Greece and its creditors remaining in deadlock. We said almost 4 months ago there appears to be little willingness on Greece’s part to make the required changes to satisfy its creditors and unlock further emergency funding to service its obligations. This point has been re-iterated any number of times over the last few months and now the complacency that that was prevalent in markets, where the assumption was something would be done to secure further funding, appears to have ebbed away and now there is over a 50% change of a “grexit” priced into markets. We are certainly not saying this is a foregone conclusion but it is more than apparent that patience is wearing thin with Greece and its game of chicken. Talks will likely intensify over the coming weeks and while a Greek default and Eurozone exit can cause any number of issues, some are beginning to pose the point, is this now the best option?
In the US housing data, weekly jobless claims and building permits all failed to meet market expectations, while the Philly Fed was the one bit of data released that was better than expected. Once again data points towards a mixed pace recovery in the US, and while it is still a recovery we question whether it is sufficient to begin raising rates, especially when global central bank policy still favours easing. There were a number of Fed speakers across the wires yesterday evening, Rosengren said conditions for a rate hike were not yet met, Lockhart suggested the Fed should wait on raising rates, while the Feds Mester said he was comfortable with raising rates soon. We’ve grown tired of Fed rhetoric at this stage and continue to focus on data coming from the US, currently it is difficult to warrant rate hikes based on recent data. With that, focus today will be on the release of CPI inflation, while the Fed do not use this inflation reference in their decision making it still provides guidance on the inflation scenario in the US, the print is expected to confirm CPI inflation at 0% year on year, with the core reading at 1.7%. Anything to the low side here will see accelerated USD selling.