GBP/EUR 1.2147 (0.8232)
The risk off tone that welcomed us into the week persisted as geopolitical concerns surrounding Ukraine and Russia saw European and US equity markets sell off, suffering their largest declines in over a month. Not surprisingly eastern European equities faced the most aggressive selling. The JPY was an out-performer yesterday as it achieved gains against its safe haven partner the USD, however both currencies were benefactors of the liquidation of risk, particularly from closely linked EM flows. Overnight the RBA held interest rates at 2.5% but did discuss factors on a historical benchmark for the currency.
We mentioned yesterday that the initial reaction is often to the extreme in these situations and overnight and this morning we have seen markets a little firmer as we await more news. The Yen gave back some of Monday’s gains on easing risk concerns and as the BOJ Governor talked down the currency in favour of the carry trade. The USD has started the day in the red as it also gives back some of its crisis gains and on comments Russia would give up using the USD if sanctions were imposed. European equities have started the day in positive territory.
Taking a look at the fundamental data released yesterday and a better than expected Eurozone manufacturing PMI yesterday could not lift the single currency as it felt the weight of selling from its close trade links with Russia. Both French and German PMI figures were better than expected but most notable was the improvement in France posting 49.7 vs 48.5 expected and prior. The French reading is still below the benchmark 50 contraction/expansion level, however any improvement will be welcome for France. The Euro calendar is light today with only Producer Price data on tap, given the better CPI reading last week these figures may be ignored as producers are less likely to pass on reduction in costs to consumers in the short term.
GBP held firm for much of yesterday showing little change against USD or EUR until the end of the European session where it came into a bout of selling dropping .5% against the USD. Data from the UK was mixed and despite a slightly better than expected manufacturing PMI reading (56.9 vs 56.8 expected) an unexpected decline in money supply data for January may have kept the reaction subdued.
The major release of this morning’s calendar comes from the UK with Construction PMI due to show a slight slowdown in the pace of construction expansion after reaching 5 year highs in January. Yields in the UK 10 year have been declining since February 12th, the same day the BOE pushed back against rate hike expectations. That being said the pound has held up regardless, however with rates taking the lead a turn in UK data could provide the catalyst for additional GBP selling.
Given the risk off environment yesterday it is difficult to gauge what value yesterday’s better than expected US data had on the dollar. As we discussed yesterday the near term future of the USD depends very much on people belief in the pace of US recovery, or lack of, and its implication on the Feds plan to continue tapering. Yesterday’s ISM Manufacturing Survey printed stronger than expected with 53.2 vs 52, with a .1% rise in construction spending also. Personal spending rose .4% in Jan vs .1% expected with personal income rising .3% vs .2% expected. All positive signs of recovery but it is difficult to look past Friday’s NFPs and jobs data, as a make or break for the USD in Q1.