GBP/EUR 1.2188 (0.8205)
For the third straight day the S&P has failed to rally to a record close and remained below the record high achieved on Monday, this lack of conviction and follow through in the recent equity bull rally has given the USD a break, allowing it to achieve its biggest rally since January 30th. We’ve been saying the USD has fallen back to risk on/off trends and as such some may see yesterday’s S&P failure and USD rally as a shift in risk sentiment. We would be less convinced but Janet Yellen’s testimony to the Senate banking committee this evening may stoke the USD fires.
This will be a similar line of questioning the new Fed chair faced two weeks ago in front of congress and despite Yellen following her predecessor’s language in the last sit down, the market will be looking for any indication of her apparent dovish stance, Dallas Fed president Fisher is also on the wires, he is a known hawk but we would expect both speakers to toe the recent party line that gradual tapering is supported. Elsewhere on the data front the US durable goods report for January is on tap, along with jobless claims. Both are expected to show improvements so may provide further support to USD following yesterday’s rally.
One of the most notable moves yesterday was a breakout in EURUSD back below the 1.3700 level which had held the pair frustratingly for the last week and a half. The average true range (ATR) for the pair over the last 10 days has been at its lowest levels since July 2007 so this breakout from a tight band was a necessity, and the break lower suggest there may be more downside.
In order for this to happen we will need to see a more bearish shift for the EUR in general and today’s fundamental calendar may provide just that event risk. To see a larger shift in EUR we need to see a change in policy stance from the ECB and currently 35% of economists interviewed by Bloomberg believe the ECB will ease the benchmark rate but we see German inflation as being key for the ECB to make a larger decision.
The last two cuts from the ECB have followed a weaker German inflation print and the German CPI reading due at lunch may provide just the catalyst the ECB need. This morning’s Saxony inflation print was worse than expected printing 1.2% vs 1.4%. Leading markit PMI data from Germany would suggest price growth is at a six month low, deflation concerns spreading to the core would likely kick-start the ECB into action.
Updated Q4 figures for UK GDP provided a little bit more detail on where the economy sits. The Q4 growth rate remained at .7%, although the year on year figure declined to 2.7% from 2.8%, although still at its fastest pace since Q1 2008. Private consumption was down more than expected while fixed investment and exports were higher than initially reported. BOE members Miles and Dale were both on the wires commenting that rate hikes would not be imminent yet GBP remains well supported.