GBP/EUR 1.2490 (0.8007)
Global risk appetite remained somewhat tepid through the first trading day of the year. Yesterday marked the close of the second quarter and European and US equities traded either side of the break-even mark with little major gains or losses being made. USD once again took a hammering, the dollar on the receiving end of selling as a result a number of catalysts. Overnight in the Asian session we saw risk appetite improve, better than expected Chinese Manufacturing PMI saw the gauge reach fresh six month highs, this helped Asian stocks rally, while the AUD also benefited from an improved environment with its largest trading partner, following a RBA meeting where they kept rates on hold at 2.5%.
GBP was one of the best performing currencies on the day, gaining ground against almost all of its major counterparts with the exception of SEK. There was little major catalyst for the GBP rally, data was light but we did see GBP buying from quarter end flows. Another note was the pounds rally higher against USD, breaking out of its recent tight range to trade to levels not seen since October 2008, which helped support sterling further.
Today’s data calendar is light through the European session with only the Markit PMI manufacturing reading due from the UK. This is due to show the second month of slowing data, we have pointed out that UK data has continued to be on the low side of expectations since April but this appears to have very little impact on GBP as it continues to rally to fresh highs. Therefore there is no reason to expect that today’s results will impact pound negatively, especially with the pounds value so heavily linked to interest rate expectations.
The EUR was another currency that enjoyed the rub on the green yesterday, EURUSD breaking through post ECB resistance and trading back towards the 1.3700 handle. We spoke yesterday indicating that in the absence of any set details on potential QE, the single currency would have room to run higher. A modest up-tick in June’s CPI reading was enough of a catalyst to see EUR buying, although this would not be enough to change the ECB’s outlook on inflation and in reality conviction behind the move was somewhat limited, especially given the larger event risk later in the week, with the ECB due out on Thursday.
Today we have unemployment and manufacturing data from the regions. Thus far the prints have been mixed, with a decline in Italian manufacturing to 52.6 from 53.2, while the French figure rose to 48.2 from 47.8 in May. The Eurozone composite figure is expected to remain unchanged at 51.9 while the unemployment rate is also expected to remain unchanged at 11.7%. The German unemployment rate has already been confirmed as unchanged at 6.7%, despite adding 10k to the unemployment lines, while the pace of German manufacturing also slowed posting 52.0 vs 52.4 expected and previous.
There were a couple of very notable technical breaks against the USD in yesterday’s trading, particularly in GBP and USD. Overall however the USD still sits on major support which still favours the bounce. We saw significant quarter ends flows resulting in USD selling through yesterday while on the data front there was little catalyst for an outright weaker USD. Equity markets were mixed, while data on the whole was positive, beating expectations with the exception of the Chicago PMI, posting 62.6 vs 63 expected. Pending homes sales smashed expectations, posting a rise to 6.1% from an expected 1.5%, while the Dallas Feds manufacturing gauge also showed a pick up in activity from 8 to 11.4 (vs 10 expected).
Later in the day the spotlight will be on the US session and its headline act will be the US ISM Manufacturing figure. Forecasts are calling for a print of 55.9, up from 55.4 in May and the strongest print since December 2013. The USD has struggled to find any support from favourable data, in the same vein GBP has failed to weaken on lower than expected data, it’s all about interest rate expectations for these two so we will be keeping an eye on bond markets for clues.