GBP/EUR 1.2723 (0.7856)
Overall risk was relatively well supported through yesterday’s session. Some better than expected earnings releases along with some firm economic data boosted investor confidence which saw stocks close the day in the green. In Europe stocks started the day on a weaker footing however a stronger than expected US GDP print for Q3 helped lift investor confidence which helped European markets pull back some lost ground. There continues to be some concern around the periphery of the region however, ECB Chairman Enria claimed the recent stress tests conducted by the ECB were not foolproof and more needs to be done, Greek and Portuguese equity markets both traded lower on the day. In the US the S&P was up .6%, closing within 1% of recent record highs. News US GDP grew 3,5% vs and expected 3% helped spark investor appetite which was further fuelled by better than expected earnings reports from Visa and Mastercard. Overnight stocks have been on the rampage with the Nikkei up 4.8% to close at a 7 year high after news the BOJ would increase their easing program and Japanese pensions funds would look towards fresh asset allocations. This drove USDJPY close to seven year highs as well, to levels not seen since December 2010
Yesterday saw the US continue to digest the less than dovish tone from the Fed’s FOMC minutes and this optimism helped the USD break back below the 1.60 level against the pound, while 1.25 looks to be the next target against the hapless euro. Wednesday night’s message was further boosted by unexpectedly strong third-quarter U.S. economic growth that showed a 3.5% annualised growth rate in the quarter vs. 3% expected. The weekly Jobless claims data also pointed towards a further improvement in the labour market. The news was in line with the Fed view that the economy is improving. However the wind was slightly taken out of the dollars sails when markets delved behind the headline number. A lower-than-expected reading on consumer spending which accounts for roughly 70% of US GDP grew by only 1.8 percent during the third quarter, down from 2.5 percent during the second quarter.
Yesterday’s data does support the broad belief that the US economy’s recovery is still on track, but as always it is still vulnerable to potholes along the way.
Today the Eurozone CPI looks set to dominate the European session, which could be a lively one. The Eurozone continues to remain beset as issues with low inflation, high unemployment and a Central Bank which is only beginning to gear up, too little too late in many people eyes. To compile all this misery, the German locomotive also looks to be running out of steam. This morning the market is looking for the Eurozone CPI measure to increase from 0.3% to 0.4% year-on-year. However, yesterday’s disappointing German inflation reading has severely damaged this expectation. A miss here today would pile the pressure on Mario Draghi to act as any further movements towards the dreaded deflation, would suggest a larger scale QE program.
Unfortunately the single currency had been far too reliant on Germany’s resilient economy. However as has been the case recently with the majority of data from the Eurozone’s largest economy has been to the downside. Political unrest and a general slowdown in global demand has seen Germans recovery falter and this has started to weigh heavily on the single currency. The future does not look particularly bright at the moment and we will likely see further declines here if today’s inflation misses.