It’s funny, despite a broad feeling the markets are stretched to breaking point, particularly in the US, little seems to phase them and the VI (or fear index) remains near long term lows, in fact the perma bulls appear to look for any slight bit of positivity to drive indices higher. Yesterday rising oil prices was enough to see US markets edge moderately higher, while in the European session stocks started the day under pressure but covered losses into the afternoon. In currency markets the Euro found itself under pressure throughout the day, ECB president Mario Draghi spoke but offered little in terms of major policy indications aside from saying the time has yet to come to think about QE and an ECB report indicating concerns on slack in the labour market was the primary driver of selling as EURUSD dropped to support around 1.0860, while EURGBP traded as low as .8382. The USD enjoyed its 4th consecutive daily advance, again little in the way of major data from the US left focus on US yields and thus as they rose the greenback found itself supported. GBP itself remains well supported ahead of today’s BOE meeting, however any move towards 1.3000 runs into sellers. Overnight a dovish RBNZ saw the kiwi drop over 100 pips
All eyes on the UK this morning, we have a raft of data including manufacturing and industrial production figures which will all precede the main event, the BOE inflation report and policy meeting. There is no change expected in the latter, the BOE in the past have said that rates can either go higher or lower as they remain ready to react, the Key however will be how the MPC vote. Any indication that some members wish to look to raise rates should favour a GBP rally. The likelihood is that should we see a shift in voting patterns, it may be on the back of the inflation report as well as the stringer run of UK data. Later in the day the NIESR GDP estimate is expected to show a slowdown to .4% from .5% through April but that is likely to play second fiddle to the main event. A break above 1.3000 is key for GBPUSD should it look to progress higher as the market will quickly run out of buyers should the BOE fail to live up to hawkish expectations. Likewise, EURGBP will need to break below .8300 should the pounds dominance against the euro continue, otherwise the larger post Brexit range from .8300 to .8900 remains in play.
Outside of the UK there is very little to get excited about. The Fed’s Dudley headlines the US session where only weekly jobless claims is worth a passing interest but unlikely to shape market opinion much. In Europe the calendar is also quiet with the ECB Praet speaking this morning suggesting the Euro area recovery can’t do without QE. The Euro was little changed on this front, but interesting angle considering Draghi’s comments yesterday as well. Markets are looking for the ECB to discuss tapering, but the banks’ heads are not showing any indication this is on tap. EURUSD traded as low as 1.0854, but has yet failed to close that gap higher from the French election, support around 1.0850 needs to give up before that can happen.