GBP/EUR 1.2775 (0.7827)
The general tone through yesterday’s session was positive, European stocks traded higher putting last week’s declines behind them as better than expected earnings results lifted the tone, in the US stocks also advanced, once again strong earnings results and speculation a stronger US economy could weather the global slowdown helped the S&P extend its all-time highs. After a week of high volatility in FX and one year highs on the FX volatility index last week we saw a quieter session through Monday, major currency pairs maintained recent ranges with the exception of USDJPY which traded to 7 year highs briefly trading at 116.00. EURUSD was .1% lower while GBPUSD was also marginally lower. In overnight markets Japanese stocks traded higher with the Topix trading to 6 year highs while the Nikkei advanced 2.1%. European stocks have started the day firmer, continuing the positive tone as the USD maintains strength led primarily by gains against the JPY.
The improving economic situation in the US, despite being mixed, has seen a strengthening of the correlation between US stocks and the USD. In short as stocks move higher the greenback follows, there is no denying the USD is on a strong bull run, especially against EM currencies where improving USD yields may see investors remove some EM risk, but also against other G10 currencies where central bank policies are diverging from the Feds current path to tightening. We have often discussed an inverse correlation between stocks and the USD, as a go to safe haven we are used to seeing USD gains as stocks sell off, this shift allows the USD to gain on two fronts now and bodes well for USD into next year when the Fed will be looking to raise interest rates. Today is a bank holiday in the US as they celebrate Veterans Day and with that data flow is quiet, without any major news flow or data USD is likely to maintain current ranges and be led by risk appetite, but may face pressure later in the week should UK inflation expectations be stronger than market expects.
Looking and GBP pairs and they remain in consolidation ahead of tomorrow major event risk, the BOE inflation report crosses the wires and with that the market will have the central banks expectations on inflation and growth which should help clear the waters in relation to the timing of a UK rate hike. A weaker inflation environment has seen BOE rate hike expectations pull back from some pricing towards the end of this year to the majority now looking towards mid 2015. Markets are particularly on edge surrounding this release, GBPUSD has faced serious declines over the last 5 months and a weaker inflation outlook carries the ability to drive this pair well below the support zone between 1.5800 and 1.5890. On the other side and brighter outlook on inflation could see a huge repositioning on GBP and help GBPUSD back above the 1.6000 level. For now we wait but we are assured of some GBP volatility tomorrow.
The EUR maintained a steady base yesterday despite some weak data points coming across the wires, weak bad loan data from Italy and industrial production figures from Greece did little to shake the single currencies resolve as markets look past most data point with eyes on the ECB and their bond purchase programs. There has been some suggestion the ECB may start to add ABS purchases to their current covered bond program and with that we would expect to see the EUR struggling to achieve any meaningful upside. The prospect of ABS purchases marginally distracted from details suggestion the ECB covered bond purchases already slowed somewhat through last week. Major data in non-existent on the Euro calendar today and as such EUR will likely trade along with larger risk trends with an eye towards industrial production data tomorrow and CPI inflation data later in the week.