Yesterday was once again dominated by selling as risk aversion continues to be the favoured trade of the week across all markets. Declining commodity stocks weighed on the European session and the euro wide Stoxx 600 was down to its lowest level since 20th September. It was a similar story of risk aversion in the US also with the major indices trading lower on the day with the Dow, S&P and NASDAQ all down .45%.
In currencies it was a mixed bag on the day. In early trade the euro was a dominant outperformer pushing EURGBP back above .9000 and EURUSD back towards highs above 1.1860. The recent press in risk aversion has favoured the single currency through the week, the euro proving attractive for those investors looking to take some risk off the table as the ECB continue to look to backstop the region, that support makes the euro an attractive alternative, along with the JPY. The euro however gave back some of its gains as we entered afternoon trade, EURUSD dropped back as US CPI inflation posted at 2% as expected but the rise in the core reading to 1.8% was better than expected and drove some USD demand. October retail sales were also firmer than expected and helped the USD rally back through much of the afternoon by up to .44% and cover most of the day’s early losses, eventually closing the day just marginally down. Overnight we saw a good rebound in risk with the Nikkei up over 1.5% while China was mixed with the CSI up .8% but Shanghai comp down .1%. European stocks have opened in firmer territory this morning and US futures are also pointing higher as well.
The pound continues to find itself between a rock and a hard place. Inflation has steadied at 3% for now, with this week’s reading below the 3.1% meaning Mark Carney avoided having to send a letter to the Chancellor as to why inflation was more than 1% off target. Carney had mentioned in the last BOE meeting when they raised rates and produced their inflation report that they would expect to see inflation top out in the coming months. Further good news for GBP was a surprising advance in wage growth released yesterday, which saw weekly earnings rise at a rate of 2.2% through September vs 2.1% expected, along with upward revisions to August wage growth as well. This provided some support for GBP and the pound managed to claw back lost ground. We’ve been highlighting the .9000 area as pivotal in GBP, for much of the last 3 months any press above that level has seen EURGBP run into sellers, quickly reversing its fortunes. Yesterday highs were posted at .9014 and the pair has since dropped back .7%. Up ahead of us today are UK retail sales, retail sales have been under some pressure and declines of .4% are expected. Anything as expected or better should see GBP garner some support. Once again we’d be looking for any rally above .9000 to provide resistance as sellers emerge, while key support intraday at .8934 needs to break if we are to see further declines. GBPUSD is consolidating between support at 1.3020/40 area, with resistance towards 1.3210/30 area initially, and firmer resistance above 1.3300. The extremes are in this range are the real levels to watch and anything else in between is just choppy trade. Later in the day we have comments from a BOE panel, including Carney, Broadbent, Cunliffe and others, we’ll have a close eye on GBP pairs from there.
EURUSD has been an interesting pair. As mentioned, the press higher in euro pairs through this week has been more about risk aversion than anything more fundamental. The fact the ECB will be buying Eurozone debt until at least September 2018 and most likely beyond, means that these assets provide an attractive investment for those looking for some shelter in risk. Further evidence over recent weeks has seen the correlation between EURUSD FX rate, and EUR and USD interest rate spreads (2yr) deviate even further suggesting the rally higher in Euro pairs is not a play on rates. We flagged an aggressive rally towards 1.1880 should the September downtrend break and while we came up short of the 1.1880 level, heavy selling began in a key reversal area which has provide both support and resistance since the beginning of August. This remains the case and 1.1860/80 area remains an area of interest for euro sellers, while support now likely comes in around 1.1735, with heavier euro buying interest below towards 1.1680/90 area. Eurozone CPI inflation headlines the European calendar with October price growth expected to have slowed to 0.1%, with the headline year on year reading at 1.4% down from 1.5%. Anything in line of worse than expectations should favour Euro selling.