GBP/EUR 1.3286 (0.7525)
European equity markets traded lower through the day yesterday, trimming gains made over the best start of the year since 1989. Some poor earnings and weaker than expected inflation data from Germany did not help the mood, neither did news across the wires the new Greek government was to begin discussions on Greek debt with EU leaders. The Danish central bank once again cut interest rates, the 3rd time in 10 days as their DKK peg against the EUR continues to come under pressure following last week’s ECB announcement. The EUR was an out-performer on the day, demand following the Danish rate cut added to EUR appreciation and some recent EUR short profit taking ahead of month end also helped contribute. In US markets, equities were higher on the day, the Dow advancing as much as 1.31% while the Nasdaq and S&P were just short of 1% gains. The USD was another outperforming currency and markets look towards today’s US GDP print for further direction. The Russian central bank is also due to meet today with an announcement due on interest rates, recent hikes to combat a depreciating currency will be in focus for markets. AUD was under selling pressure all day as expectations for a rate cut in the RBA’s Feb 3rd meeting increase.
The EUR faces a couple of major releases today and while the single currency has traded higher through the week, the prospect of €60bln per month in QE will likely keep the euro at a low ebb. The bigger picture hasn’t changed, yesterday’s run of German data was worse than expected with year on year inflation declining to -.5% (EU harmonised level). Despite the weak reading the EUR was unperturbed, so with Eurozone CPI the focus for this morning’s session we will look at possible scenarios.
Expectations are for the benchmark CPI reading to have declined to -.5% year on year, with the core reading maintaining its level at .7%. After yesterday’s weak German print expectations are now skewed to the downside of this figure but we question the larger impact either way. Overall inflation expectations for the region are at almost record lows, CPI is certainly not expected to pick up in any great manner and even if it does it will not impact the ECB’s program announced last week. Therefore we question the ability for the reading to have any major impact on EUR rates, aside from some short term volatility. We still expect some further EUR downside as QE takes hold but for now the EUR appears content to consolidate just above recent lows. EURUSD is looking to test to the topside of the week’s range, a break of 1.1425 could well see us progress back towards 1.1662. EURGBP also broke back above the weeks range yesterday, potential now for a move back towards .7550.
GBP has faced some selling in the last 24 hours, once again short sterling futures (interest rate) are suggesting we will not be seeing a rate hike until 2016, this is weighing on GBP as the BOE’s credibility comes under some questioning, especially if we look back at some of last years “guidance” comments. Inflation remains subdued, not helped by the UK’s close proximity and trading links with Europe, a dovish shift from this month’s BOE meeting also weighing on GBP sentiment and while other areas of the economy are showing signs of improvement the pound’s outlook will not improve unless the interest rate environment/expectation does.
US GDP will be the main focus for the afternoon session and 4th Quarter annualised growth is expected to fall back to 3% from 5%. US GDP has surprised to the upside since Q2. This will put the USD firmly in focus, especially as the market and the Fed continue to see US growth outpacing that of its counterpart regions. Once again the USD’s strength has been generated from the expectations that the Fed policy outlook is diverging, however with inflation below 1% and GDP slowing the big question is, is the US impervious to the current global slowdown and weak inflationary environment? We continue to see potential upside for GBPUSD when looking at this front. Comparing the UK and US on key central bank metrics: UK GDP is at 2.7%, inflation at .5% and unemployment at 5.8%. The US: GDP is expected to be 3%, CPI inflation is at .8% and unemployment at 5.6% – there is not much difference in key metrics yet GBPUSD has dropped 13% in 7 months. As downward momentum slows in GBPUSD we would not be surprised to see a bounce higher in GBPUSD, especially if today’s US GDP print proves weak.