GBP/EUR 1.2556 (0.7963)
There is a notable air of complacency in markets and this has not gone unnoticed by central banks. In equity markets yesterday European stocks were little changed in anticipation of the Fed minutes from the June FOMC meeting. The minutes themselves offered little new in terms of guidance on rate increases and this once again allowed US equities to rally as stocks rebounded from a two day sell off. Needless to say the USD bore the brunt of this rally in risk, declining for the third straight day.
The decline in the USD was limited however, the minutes from the June FOMC statement echoed the sentiment from the policy release, in the normal course of action most would deem to be more positive for the USD with an upbeat view on growth. There was however a couple of notable exceptions from the Fed policy announcement, again we would have expected this to be supportive of the greenback but the decline in US treasury rates proved otherwise. The Fed highlighted that some member believed that markets were too complacent (echoing statements from the Bank of International Settlements earlier in the week). The concern is that markets are not fairly pricing in the risk of future rate increases, and increasing speculative risk.
The second notable point was the suggestion that QE3 would be completely wound down by October with the final taper of $15bln at the October 29th meeting. The completion of the QE program is the first step to beginning the rate hike discussions, for now Janet Yellen appears content to appease markets with low interest rate rhetoric but should that change, both speculative risk and the USD should see an inverse change in fortunes.
The US calendar remain relatively light today with only weekly jobless claims on tap and unlikely to have too great an impact on the USD if a bumper NFP cannot kick start a real rally. The biggest USD interest today will come from Fed speakers, with the Kansas Fed President Esther George and Vice Chair Stanley Fisher due across the wires. Any indication of positivity of rate or the growth outlook should help USD, but we really need to see follow through on this to kick start a USD rally.
On paper the biggest event of the day is the BOE rate decision and asset purchase target announcement. The reality however is that there is very little expected change with rates on hold at .5% and the asset purchase target unchanged at £375bln. Despite the run of weak data the pound has been unwavering, there has however been a notable stall in the pace of its advance over the last two weeks. No change from the BOE means they usually do not release a statement, and we will have to wait for the minuets to be released in two weeks. Any indication of change is likely to further support the pound as the BOE appear to be favouring a tightening stance, versus the accommodative policy from the US.
The Euro was firmer on the day but the performance lacked the appearance of real strength or follow through. The single currency advanced against a weak USD, while it also pulled back some ground against GBP, although it still remains firmly anchored below the .8000 figure. There are plenty of potentials for EUR weakness in coming months, the ECB rate cuts have been absorbed already but the prospect of QE will remain unless we receive clarification otherwise from the ECB. There is also the risk of the repatriation of capital, the huge amount of flows into Eurozone peripheral debt has seen yields fall to all time lows, this again is concerning given the risks that remain in the Eurozone, there has to be something amiss if Spanish debt is cheaper than US debt.