Market News & Insights
4 June 2014

Markets nervous ahead of ECB Meeting

EUR/USD             1.3611

GBP/USD             1.6711

GBP/EUR             1.2277 (0.8144)

EUR/CHF             1.2219

GBP/CHF             1.5001

GBP/AUD             1.8012


Tuesday saw UK house prices rise to a record in May. Values increased .7% from April to £186,512 surpassing October 2007 peak average of £186,044, furthering Bank of England concerns that a property bubble may be emerging. Whilst this figure shows a slowdown in May from April’s figure of 1.2% it is still the 13th straight monthly increase. With mortgage rates close to all time lows and labor market conditions continuing to improve, underlying demand for homes is likely to remain strong. Also, UK Construction PMI came in lower than expected at 60 down from 60.8 in April. However, this is still well above the key 50 level separating growth from contraction. Despite this data sterling failed to rally after hitting a high of 1.6782 throughout the day and is back nearer the 1.6710 mark this morning.


Across the other side of the world the RBA left interest rate unchanged @ 2.50% as expected for the 10th straight month. As Australia’s fragile labor market recovers rates are likely to remain at these levels for 2014.


Meanwhile in Europe we saw Euro Area inflation slowing more than forecast to 0.5% in May down from 0.7% in April and lower than the anticipated level of 0.6%. EU Unemployment came in lower than expected at 11.7% down from 11.8% last month. The market is short Euro at the moment betting the currency will weaken, however, if the ECB doesn’t deliver additional measures to a rate cut then thesingle currency could move higher. Euro was bid most of yesterday leaving the previous daysEURUSD low well behind after reaching a high of 1.3647 yesterday. However, it is drifting back lower again this morning. Similarly, yesterday EURGBP rose from a low of .8104 to a high just shy of .8150.


Over in the US, Factory Orders for April came in at 0.7% lower than 0.9% in March but higher than the expected 0.6%.


Very busy on the data front today where we have the beginning of the G7 Leaders two day summit in Brussels. We are expecting PMI data from Germany and France and Euro Area PMI, GDP and PPI for April. From the UK we have CIPS/Markit Services PMI and from the US due later today includes Fed Beige Book this evening, International Trade April, Final Markit Services PMI (May) and Services ISM (May) along with Business Activity. However, it will be tomorrow’s ECB meeting that will take centre stage along with the Bank of England Policy announcement, although no change expected there. The question is as to whether the ECB will just lower interest rates by 10-15 bp’s as widely anticipated and is well and priced into the market or whether they will deliver more unconventional policy measures to help tackle low inflation and weak growth along with the interest rate cuts. Meanwhile World Bond Yields continue to trade at extremely low levels signaling that investors want to see Mario Draghi take more action to counteract deflation and stagnation.


Today will also bring a interest rate policy announcement from Canada. It is expected rates will remain on hold at 1% for some time. The Bank of Canada wants to curb consumer borrowing against a backdrop of a sluggish economy and so is caught between a rock and a hard place.