GBP/EUR 1.2130 (0.8244)
The snail’s pace USD rally from last week came into headwinds in the form of fresh highs in the S&P as the safe haven greenback faced selling as risk trends rallied. The S&P failed to hold on above the 1850 level reached initially at the end of last year and the lack of follow through again raises questions about the strength of the recent rally. Elsewhere CNY fell for the sixth consecutive day, the drop of .27% against the USD was the largest decline since May 2012. CNH, renminbi’s deliverable, also faced declines. A recent shift to neutral monetary policy in China has allowed the currency to depreciate.
Euro complacency continues to dominate in the face of continuing deterioration of fundamental data. Capital inflows and an expanding balance sheet have helped the EUR remain close to recent highs against the USD but as the complacency grows so do risks of an aggressive EUR reversal. Should deflation be realised, should the ECB decide to act on some form of bond purchase plan, or should some of the many downside risks for the region return. The single currency is left extremely vulnerable on current positioning. Yesterday’s confirmation that January CPI inflation fell by 1.1% should have kept the Eur lower, especially ahead of Thursdays February release.
Looking at sterling gilt yields and the libor curve shows that hopes of a BOE hike are fading. That is not to say we are seeing a reversal of the recent rate hike expectations more so a flat line based on where we are currently positioned. This means that we are likely to see a breakout soon and if the BOE are to be believed current positioning is ahead of the curve, meaning the risk of a downside break in rates is real, which will result in some GBP selling. UK data remains light until tomorrow’s Q4 GDP release.
Today’s calendar remains light on major data. We have already seen German GDP data come in as expected, the final release of the figure throwing up no surprises. We see some surprises in the underlying data however with a surprise decline in domestic demand and imports, while exports and capital investments grew unexpectedly.