GBP took a plunge when inflation data came in weaker than expected yesterday knocking some of the wind out of the pounds’ sails. We’d highlighted the risk through the week and our expectations of a weaker print were justified as price growth slowed considerably from market expectations. GBPUSD dropped almost 1%, while EURGBP was up over 1.7% from the weeks lows posted at the market open. USD was under pressure once again as it continued its decline as the argument around healthcare storms on. The key for us is to look through all the noise surrounding the present administration and to focus on what exactly is getting done, sadly it appears to be very little and major campaign points of economic relevance to the US have not materialised.
The Euro was the day’s outperformer ahead of the ECB meeting tomorrow, EURUSD surged to 1.1582 yesterday before some selling pulled it back to 1.1522 support, while EURGBP took a look at .8900 once again. General risk sentiment is negative in early trading with European indices weighed down by weaker earnings, while in the US a weaker open found buyers emerge on the dip lower with the Dow closing marginally lower, the S&P up a meagre .0 6% while the NASDAQ bucked the trend to open up .47%. Overnight in the Asian session we saw Japanese markets struggle for real traction but eventually closed higher while better than expected Chinese data helped lift Chinese markets, keeping both AUD and NZD in demand as well.
The dip in the UK’s inflation report did not come as a surprise. In fact the BOE’s inflation report in May highlighted this decline in inflation in their forecasts although markets had not priced it in, hence the drop in GBP following the release. The headline reading saw inflation at 2.6% down from 2.9% previously and expected, although the BOE expect to see this build back towards 3% through the rest of summer and yesterday’s weaker print will not change the BOE’s larger term view on inflation. Where that leaves BOE policy is anyone’s guess, we’re getting mixed signals from Mark Carney and the rest of the MPC appears split on if/when the BOE should raise rates, or perhaps at what point of above target (2%) inflation will they be forced to act.
We saw a slight recovery in GBP pairs from the lows the BOE pushed back on the weaker inflation reading, it’s a light data calendar today and with that Brexit news flow will likely pose the biggest risk to GBP direction. EURGBP downside likely favoured if we close the day below .8865/70, topside we see sell orders around .8900 up to .8952, downside support around .8825/40 area.
The Euro’s rise continues in earnest but it’s very hard not to see the market getting ahead of itself here. Recently we’ve seen major central banks stepping back from the tightening rhetoric, most notably the Fed but also the BOJ promising to continue easing as necessary while RBA, RBNZ and the BOE are all providing mixed signals, although certainly not outright hawkish. The ECB’s comments that we have seen lately have continued to focus on the importance of its loose policy stance in getting the economy where it is and wanting to remain accommodative as required. There’s been little indication we’ll see any action this week and should the press conference suggest tapering has not really been discussed then we’ll continue to see the Euro as a selling risk. That being said, we cannot argue with current levels and they continue to provide excellent opportunities for Euro sellers to get some great value, both on spot trades and putting forward cover in place as forward points remain in favour.1.1580 provides upside resistance in EURUSD, downside supports around 1.1520 and 1.1475 and 1.1450 below key to holding the uptrend.