GBP/EUR 1.2080 (0.8278)
Last week was a tough environment for risk as riskier assets faced selling, including equities which saw a broad based sell off across the globe. This did not have the usual beneficial effects for USD however as falling treasury yields put the greenback under selling pressure. The USD decline was halted on Friday however following stronger than expected PPI figures, while the University of Michigan Consumer confidence report was also better than expected posting 82.6 vs 81 expected. Overnight in the Asian session equity markets remained mixed, while the EUR opened the week with a large gap lower following comments over the weekend from the ECB’s Mario Draghi and Board member Coeure.
The single currency faced selling from the open of the FX markets after Draghi and Coeure made a number of comments over the weekend, the next chapter in the ECB offensive to talk up stimulus expansion. Draghi told the IMF spring gathering that the exchange rate has now “…become more and more important for price stability” in recent months. Given the ECB’s primary remit is to maintain price stability this would suggest they may be looking to move away from their verbal intervention tactics as the EUR remains stubbornly high.
Draghi warned that keeping monetary policy as accommodative as it is today would require further stimulus should we see further appreciation. Coeure provided some elaboration on the theme saying the ECB asset purchases, similar to QE policy in the US, may look to target medium to longer term securities. We have mentioned in the past that the ECB may be holding off until the finish of the banks stress tests and asset quality reviews before we see any action, this was also hinted at by Coeure.
The economic calendar is light in Europe this this morning, Italian CPI data for March is expected to highlight inflation falling from .5% to .3%, a consistent theme in Europe these days. Elsewhere Eurozone industrial production is expected to have grown at .2% through February. Currently EURUSD is down from its highs around 1.3900 reached on Friday, while EURGBP has fallen back from above .8300.
The USD was firmer on Friday and overnight as PPI and confidence data suggest belief in the recovery in the US. Retail sales due for release later today however will paint a better picture of confidence on the high street. The March figure is expected to have grown .9%, the largest rise since September 2012. As with many US releases a strong reading here will provide confidence in the continuity of the current pace of tapering and should provide a further lift for the USD.
Data is light from the UK today but one notable technical indicator on GBPUSD has my attention. This pair has been range bound between 1.6300 and 1.6800 since the beginning of the year, on Friday the pair made another attempt at the top of the range above 1.6800 but once again failed and is now down over 100 pips from Thursday’s highs. Should the USD firm up this may be double top setting up opening the doors for a larger move lower. A decline in UK yields will be essential to this so any signs of weaker data from the UK will help the move.