GBP/EUR 1.3899 (0.7194)
The USD was weaker on the whole yesterday despite very little in terms of data releases, if anything stronger major counterparts favoured USD selling. The EUR rallied through much of Tuesday’s session, albeit still remaining well within Monday’s opening range, GBPUSD also pushed higher but also remained firmly fixed within a two day range. In overnight trade the AUD was an outperformer, the Aussie has been giving mixed signals of late, the RBA have been on an easing cycle with the potential for further interest rate cuts but key data points have been better than estimates, last night’s CPI inflation reading was just that at 2.3% vs 2.2% expected. US markets were mixed yesterday with only the NASDAQ posting gains but Europe has been a different story and once again all major European bourses are in the green on this morning’s open.
The biggest data release of the day comes from the UK with the release of the BOE’s minutes from their April meeting. Thus far GBP performance this morning would suggest markets are expecting a slightly more upbeat release than we have seen in the last few months. Leading indicators from the UK suggest that the UK economy has once again been accelerating in 2015, and despite some concerns over inflation, overall the UK economy remains relatively robust. We have also seen indications of a bottoming out in the Eurozone, the ECB’s QE program is only in early stages but increased demand from the Eurozone, which accounts for almost half of the UK export market, has been a positive development for the UK.
The one major issue has been inflation which remains at 0%, the BOE in past releases have suggested that UK inflation could in fact fall into deflationary territory but with Eurozone inflation on the rise and fuel prices also on the up this may not actually come into fruition. With the above data we would expect the BOE to strike a slightly more hawkish tone however the major caveat is the May general elections, the current coalition are unlikely to want the BOE to rock the boat too much ahead of elections and we feel they are more likely to maintain recent neutral rhetoric. Any indication of a more upbeat MPC however will encourage GBP buying as rate expectation move in from Mid 2016.
Home sales data tops the bill in the US and has been anything but consistent. Analysts suggest existing home sales are due to rise 3.1% through March from 1.2%.The USD index is trading mid range between its recent 12 year highs and March’s lows. The USD rally has been one of the most consistent trends since July last year when the Fed began to discuss the implementation of tapering. Since the end of the Fed QE program the USD has continued to advance in the face of almost all other major currencies, where many central banks were still adapting an easing cycle. This is still the case with many of these central bank, the ECB, RBA, BOJ to name just a few. The issue now facing the US is the argument that the current data from the US does not warrant a rate hike. While there appears plenty of opinions either side the fact remains for USD that the longer rate hikes remain on hold the less likely the USD will maintain total dominance, in essence the USD’s rally higher could be preparing for a correction. For now we will continue to focus on the data releases to gauge appropriate timings for the Fed to begin tightening policy.