GBP/EUR 1.1781 (0.8485)
Yesterday brought us rallying stock markets and a stronger USD as data from the States surprised to the upside. Durable goods orders increased by 3.6% versus 3.0% expected, US Consumer Confidence posted an increase to 81.4 versus 75.1 in May and new home sales increased 2.1% versus 1.3% expected. While this data is not spectacular, in historic terms the better than expectation results certainly indicate the US is on the correct patch and adds fuel to the early taper argument.
The EUR was feeling under pressure yesterday after a weak Italian bond auction, demand was above what was needed but a huge increase in yields indicate that Italy had to pay up considerably and resulted in some “Italy may need a bailout” headlines being generated.
This is a bit dramatic but the 10 year yield did drift to its highest levels in over four months. We have often noted the single currencies resilience to such news, such events have occurred so frequently in the past 4 years that until the bad news is confirmed the EUR remains firm, these are risks we are always aware of in the Eurozone and as such feel the EUR is still vulnerable to shocks and prolonged weakness through austerity measures.
Mervin King gave his final testimony before the treasury committee, over all there was nothing much new here but a parting comment from King attracted some attention, he mentioned that although Carney may be more persuasive, he is not likely to gain more traction than his predecessor. King has been one of the voters in favour of expanding current asset purchases but the majority of the MPC do not agree and even Carney is likely to find it difficult the sway them. This supports our view that the BOE will move away from QE style easing, although we shall wait for Carneys first MPC meeting on July 4th.
We have a slightly more active morning today, the European economic calendar has already given us final revisions for French GDP figures, confirming France’s contracted by .2% in Q1, posting -.4% year on year. The EUR has found a small boost from the German GFK Consumer Confidence Survey, which posted 6.8 versus 6.5 expected confirming the pick up in confidence as data from the core of Europe has improved. Mario Draghi is due to speak in Paris this morning; we’ll be keeping an eye on headlines for EUR flows.
The release of the BOE Financial Stability report tops the remainder of the releases in Europe. This is a semi-annual report, the last in November warned of a Eurozone debt crisis risks, and called on banks to increase their buffers. The Eurozone has been relatively stable since then, however the UK banking situation has been volatile. That being said the impact on the pound should be limited.
The US session brings us the 3rd revision of Q1 GDP estimates, they are forecast to show the US grew by 2.4% Q1. We do not expect a change in this reading but any improvement will be viewed as a step in the right direction and closer to an exit for QE, which will boost the USD.
EURGBP continues to test lower, reaching our target of .8475 yesterday, it has pushed to fresh June lows and we are looking for a larger push back toward .8425 now, with resistance to the topside just above .8500 and again just above .8520. EURUSD looking to break back towards 1.3000 with resistance to the topside around 1.3150. GBPUSD looks firmer, still well above last week’s lows below 1.5350 but is likely to be driven by USD movements.