GBP/EUR 1.2631 (0.7917)
Markets through much of yesterday’s session remained relatively unchanged. In Europe, the lack of major data points and shortage of any major news releases saw European equities trade just below their opening level through much of the day, taking stock after the biggest weekly decline since May 2012. A bank holiday in the US meant trading was restricted however equity markets remained open and continued their slide with the S&P down over 1.6%, while the NASDAQ dropped 1.5%. In commodity markets Oil prices have been on the decline, the move lower exaggerated by concerns on a global slowdown dampening demand, while gold, a benefactor of safe haven flows, has seen its value rise 4.6% in the last week.
The currency markets have been taking some leads from risk aversion as well, USDJPY fell to a 1 month low as demand for JPY outpaced USD in the battle of the safe haven currencies, the USD erased some of these losses over night as the JPY gave back some of its gains, falling back against another 15 major currencies as well. The EUR managed to gain traction through much of yesterday’s session but EURUSD once again faced selling pressures ahead of 1.2800, while EURGBP managed to break above last week’s resistance at .7900 to reach highs of .7935. Once again two higher yielding currencies bucked the trend, with demand seen for AUD and NZD, both still carrying positive effects from Chinese trade data which showed positive improvements, both imports and exports rising.
US markets return in full today, while the data release calendar through the European session also has a little more bite to it. The major release of the morning will put focus back on GBP. CPI inflation data is due across the wires and the pound has already been under pressure this morning as analysts expect inflation to drop to 1.4% from 1.5% year on year, below the BOE’s 2% target. The fall to 1.4% will mark a five year low in this inflation reading, UK price data has also tended to be to the low side of expectations over the last few months so the possibility of lower price is very real. We will be looking at UK rates, in terms of SWAP rates and gilt yields, a low inflation print will see markets reduce their bets on UK rate increases and could well start another bout of GBP selling ahead of tomorrow’s labour market data. On the positive side, should inflation show signs of picking up, the argument for rate hikes becomes stronger and we would expected a firmer GBP.
Next up on the fundamental calendar is sentiment data from Europe in the form of the German (and Eurozone) ZEW. This economic sentiment indicator has been on the slide for several months and has tended to be lower than expectations. The Survey is broken into current and future sentiment so provides a good indicator on future flows. Sliding sentiment indicators have been an indicator that investors are shying away from the Eurozone for investment, further declines will not be beneficial for the single currency. Industrial production for the region also crosses the wires and is expected to have declined 1.6% through August. Once again the Eurozone struggling to find anything positive from its indicators. US markets are back in full today, but there is little to gather interest in terms of economic releases. Risk appears to be the main play thus far this week, with that in mind we’ll be watching indicators for a change in sentiment but for now risk aversion continues to dominate.