GBP/EUR 1.2640 (0.7911)
The lack of any major data through yesterday’s session saw fx markets trade in consolidation. It is almost becoming par for the course on Mondays, especially when data releases are limited. Major FX pairs appear content to trade in tight ranges, allowing markets time to absorb the previous weeks move with an eye on the current week’s releases. As mentioned yesterday, there are plenty of major releases to catch trader’s attention this week, most notably from the US, meaning USD pairs are certain for some volatility through the week, yesterday was the calm before the storm.
Equity markets in Europe swung between gains and losses with little major moves of note, while through the US session stocks erased early losses to close the day relatively flat. On the currency front the USD was marginally firmer on the day against a basket of major currencies but overall USD trading was limited. EURUSD traded within a 17 pip range, the second tightest daily trading range since the EUR was introduced, while GBPUSD traded with a 35 pip range, narrow margins in any environment. The large amount of event risk for USD is to partly to blame (although FX volatility has been in decline all year), the FOMC are due for release tomorrow evening but before they announce their policy decisions we have the second quarter GDP print due for release.
Both these events are some of the biggest releases for USD in their own right, both due for release on the same day opens up a lot of possibilities for USD currency pairs and traders prefer to remain sidelined until the outcome is clear. The GDP figure is expected to have rebounded to 3% growth through Q2, rebounding from the dismal 2.9% contraction in Q1. Anything lower is expected to put the USD under further selling pressure. The FOMC are due out tomorrow evening, should Q2 growth be in line with expectations we would expect to see the Fed upgrade their assessment of the economy, while confirming the completion of Tapering in October.
Pending home sales released from the US yesterday declined by less than expected year on year, at -4.5% vs -5.2% , thanks to a large upward revision from the June figure, up 6% from an original -6.9% decline initially reported. The Case Shiller House Price Index and US consumer confidence top today’s US session, although we may well see USD continuing to trade in tight ranges ahead of tomorrow’s key event risk.
We have highlighted the performance of GBP all year, and continued to outline the correlation in its performance to interest rate expectations. We have a number of arguments as to why we do not expect a rate hike before year end, as with many major central banks the timing of rate hike’s carry many potential risks to recovery. In the UK inflation remains below target, wage growth continues to decline relative to the curve and spare capacity remains in the economy.
One argument in favour of interest rate increases however is as a means to tackle a “housing bubble”. The BOE have taken other measures to try halt the pace of house price growth, and while we may not be in a bubble just yet (as many would argue), should price growth continue to expand the BOE may well be forced to use traditional methods to curb house price growth (rate hikes). With that in mind mortgage approval and net consumer credit data crosses the wires in this morning’s session.
The EUR was little changed through yesterday’s session, we mentioned the tight range versus the USD, the single currency also maintained a 10 pip range against GBP. Today’s calendar from the Eurozone remains light, with only German import prices due for release. Tomorrow the run of CPI inflation data begins with the German print, as well as confidence indicators for the whole region. The outlook for inflation and the EUR remains to the downside.