GBP/EUR 1.2161 (0.8223)
The US was closed yesterday for President’s Day and the European session had no economic releases to stoke market volatility and as such yesterday’s trading day was a very dull affair. GBP pulled back from its recent high levels, with GBPUSD falling back towards 1.6700 from multi year highs above 1.6800 reached late on Sunday night. EURGBP also pulled back above .8200 having made another attempt at multi year lows on Friday. Overnight the yen was the biggest loser after the Bank of Japan announced they will extend their “Stimulated Bank Lending” and “Growth Support Funding” facilities. This helped the NIkkei rally over 3% but saw JPY tumble across the board.
Further overnight news saw the outlook for AUD improve although there was little material change in the Aussie against its main trading counterparts despite initially rallying. The minutes for the RBA’s Feb 4th meeting indicated the bank had concerns about inflation remaining unexpectedly high and repeated their neutral outlook for forward guidance, with rates expected to remain stable.
The USD got its first day of respite yesterday following aggressive selling through last week and one of the worst runs since 2006. The USD has been facing selling as US equity markets enjoyed their best week in 2014, however both had very little hard fundamentals driving them. There are concerns weak data may see the pace of taper slow but did it warrant a complete reversal of USD moves since December’s surprise taper? The US returns to the markets today and tomorrow’s FOMC minutes should provide further clarity of the Fed’s stance and capacity for weaker data.
There is clearly a growing optimism in Eurozone fundamental data and even the negative aspects of the region’s performance tend to have very little impact on the single currency. Concerns on another credit crunch appear to have abated, a recent Fitch investor survey saw only 33% of respondents with concerns sovereign markets were still at risk, a three year low. This is a positive validation of the capital flows we have seen going back into the region over the last 10 months. Peripheral yields have reacted accordingly with record low yields seen in Spanish and Italian short term debt. The ZEW investor confidence survey is due this morning for Germany and the Eurozone region and could yet see EURUSD challenge recent highs.
The pound has been facing selling pressures this week following its huge bull run post quarterly inflation report. The BOE removed their set objectives for raising rates and instead will focus on spare capacity, this still leads markets to anticipate rates would be rising far earlier than initially guided and hence the rationale for the pounds recent run. One of the BOE’s original targets was inflation and with the core reading currently below BOE targets today’s inflation report can still carry some weight. The headline figure is currently at 2%, anything less than this will see accelerated GBP selling.