GBP/EUR 1.2051 (0.8296)
Well if Monday markets were still dazed from Friday’s taper knock out Non Farm Payroll’s then in yesterday’s session they managed to find their feet. Stronger than expected data from the US lifted risk sentiment, we saw US treasury yields begin to rise again and demand pick up for the USD. The strong US figures lifted European equities from negative territory in the final hour of trading to show small gains, whilst the S&P 500 advanced by its largest margin in 2014. This positive sentiment carried over into the overnight session with Asian stocks rising after the World Bank raised its global growth forecasts.
The USD advanced against 16 of its 17 major counterparts in the last 24 hours after US Retail Sales, Small Business Optimism and USD Business Inventories all beat expectations. This would suggest that Friday’s weak payroll figure may have just been a blip.
The greenback should also have found some support in hawkish Fed speakers which dampened speculation that Friday’s poor figures would impact the pace of QE tapering. Dallas Fed President Fischer and Philadelphia President Plosser supported expectations for another $10 bln reduction in QE in the January meeting. Both are FOMC voters and both are known hawks but their resolve hasn’t wavered on the basis of one weak data point (NFP’s).
Later in the US session we have USD Empire Manufacturing survey and PPI data, as well as the Fed’s Beige Book report of economic activity. There will also be another Fed member speaking, although this time the speaker, Evans, does not carry voting rights.
The EUR was a notable strong performer on the day yesterday, performing firmly throughout the European session, although it still struggled against GBP, and later in the evening against USD. As is often the case with the resilient single currency there was little fundamental data driving this bout of strength. Granted there was a strong release of Industrial Production for the region posting 1.8% vs 1.4% expected for November. Elsewhere though French President Hollande, facing his on private issues, announced plans for major spending cuts as France struggles to find growth. There was also an ECB document released announcing concerns on bank stress tests.
Data released this morning again was not euro supportive as an initial German GDP print for 2013 suggested the economy only grew at .4% vs .5% expected, with the trade balance to GDP ratio posting a negative figure of -.1%. Today’s Euro calendar is relatively light from here out, with only Eurozone trade balance figures due.
GBP continues to trade within recent ranges, holding relatively firm despite evidence suggesting that pressures on earlier than expected rate hikes are dissipating. We’ve often voiced concerns about the positioning of GBP, thinking last year’s move was slightly exaggerated having achieved phenomenal gains over the second half of the year.
Rate hike expectations had moved into late 2014 territory despite BOE guidance suggesting otherwise. Yesterday’s inflation reading would be more supportive of the BOE’s late 2015 guidance than market positioning, with the CPI reading falling to .4% for December, vs .5% expected, bringing the Core CPI Inflation reading down to 1.7%, with and the Annual CPI reading back in line with BOE 2% targets for the first time since 2009. GBP has held for now but the case for a weaker pound is growing and we would not be surprised to come into some heavy GBP selling should weak data points continue.