GBP/EUR 1.1918 (0.8387)
European and US equity markets failed to follow Asian markets higher yesterday as manufacturing indicators across both regions pointed to slower growth than in previous months. Overall yesterday Chinese, European and US manufacturing data was worse than expected indicating that the global manufacturing recovery still remains fragile. Overnight markets in the Asian session ebbed and flowed between gains and losses as concerns rise on a slowdown in EM markets following a S&P downgrade to Brazil’s credit rating to BBB- with a negative outlook, and on concerns the Russian economy will slip into recession.
The Euro was lower through most of the day yesterday despite a huge jump in French PMI data, the decline in German figures was less severe but carried greater weight for the EUR as it faced selling pressures following the release. The Eurozone composite PMI declined to 53.2 as expected, from 53.3 in February, but still maintains levels close to 2.5 year highs. What was more interesting for the single currency was a universal rally, up over 90 pips vs USD and up over 30 pips vs GBP, the move in itself was not unusual but it came after the European session had closed and long after any data releases or information across the newswires.
German IFO confidence data headlines the European session today, the business confidence indicator is set to show its first decline in five months ticking down to 110.9 after reaching the highest levels since July 2011 at 111.3. The lower reading may see some short term selling for the Euro, particularly if it is reflective of a disappointing reaction to the lack of action from the ECB. We would expect any follow through to be limited however as the IFO is going to have no impact on ECB monetary.
The pound now finds itself in a somewhat vulnerable position before we head into some significant event risk. GBPUSD has been testing monthly lows over the last week and its failure to rally back would suggest that GBP buying interest is lacking at the moment, it is in a similar situation against the EUR, where the single currency is at three months highs against the pound. The event risk we have today provides a good indication on whether the BOE need to raise rates as we await the CPI inflation report. An improving jobs market may see the BOE stop loosening policy, however only rising prise pressure will see them tighten.
The headline CPI figure is expected to decline to 1.7%, the lowest level since October 2009, down from 1.9% last month. The BOE’s focus on absorbing spare capacity would imply they need to see a pick up in inflationary pressures so anything showing a decline or stagnating price growth is likely to see rate rise expectations for GBP pushed further down the curve. This will result in further GBP selling as much of the pounds recent strength has been on rate hike expectations.
The USD faced selling pressures yesterday as Markit PMI posted 55.5 vs 56.5 expected. That being said it still remains firmly in expansion territory. The worrying aspect for USD is that short term strength is not going to come from last week’s Fed outlook, data needs to be supportive if the market is going to trust in the Fed’s guidance. With that in mind we will be looking at house price data, as well as new homes sales figures this afternoon, but the Consumer Confidence release is likely to to have a greater impact on USD.