GBP/EUR 1.2507 (0.7995)
Risk certainly found itself in a better position yesterday versus last weeks close. Equity markets were lead higher by European gains with the DAX advancing 1.7% while the rest of the major European bourses posted gains. In the US session the NASDAQ composite climbed to a 14 year high while the S&P also rose, to within .8% of record highs. The relaxing of geopolitical tensions provided investors with some hope for now but the line between risk on and risk off has become increasingly narrow with markets increasingly vulnerable to headlines from Ukraine/Russia, Israel/Gaza, and Iraq and Syria. For now tensions have eased, progress in Ukrainian/Russian talks, an extended ceasefire between Israel and Gaza and Iraqi progress against militants has helped boost investor confidence.
In overnight trading the positive tone continued, Asian stocks advanced as did the Aussie dollar following the release of the RBA minutes. There was little surprising in the release but it appears the removal of a potential risk event helped the higher yielding AUD catch up with other risk supported assets. The USD was also a notable performer yesterday, achieving most gains against the EUR following a report that US homebuilders confidence has reached its highest in 7 months. The USD will be looking towards inflation data this afternoon with the release of CPI. Analysts expect inflation to have fallen to 2% from 2.1% through July. Should inflation be any weaker we may see the USD give up some of its recent gains as markets scale back Fed rate hike expectations.
UK data is first up this morning and similar to the US markets will be looking towards the CPI inflation reading to gauge rate hike expectations. Analysts expected year on year inflation will drop to 1.8% from 1.9%, the shift away from the BOE’s 2% target will give those looking for BOE rate hikes cause for concern, especially as UK inflation data has tended to be below estimates since the beginning of the year. The inflation outlook for the UK has started to carry a little more weight following last week’s inflation report, especially with concerns on wage growth. Anything on the low side will likely see increased GBP selling, with GBPUSD already trying to close the gap between Friday’s close and Sunday evening’s open.
Data remains light from the Eurozone this week, we will have to wait until Thursday for manufacturing and services PMI data, while on Friday ECB president Mario Draghi will speak at Jason Hole in the US. This leaves the Euro open to being led by other currency demands, especially following last week’s poor GDP figures across the region, especially in the “core” countries. EURUSD remains just above key support around 1.3330, a break below here will likely see accelerated declines.