GBP/EUR 1.2690 (0.7880)
Yesterday was all about the USD, rising treasury yields, supportive comments from the Fed’s Fischer, falling commodity prices and a generally more subdued outlook for most of its major competitors helped the USD rally across the board. A downgrade to Russian GDP saw the Russian Ruble face aggressive selling once again, the Ruble has declined over 25% against the USD so far this month and there is no end in sight for the struggling Russian currency. Overall the risk environment remains relatively well supported, US stocks traded higher through yesterday’s session, supported by some decent data prints while overnight the Nikkei and ASX both traded higher. European markets had opened in the green this morning but the tide has turned following some weak data points. The EUR has found itself facing some heavy selling, EURUSD falling to fresh 28 month lows following weaker than expected services and composite PMI data this morning while EURGBP has dropped back below .7900.
The rally in USD started following comments from the Fed’s Fischer suggesting the FOMC are nearing the end of their “considerable time” rhetoric regarding the timeframe before the first Fed rate hike. A better than expected construction spending figure from the US, rising 1.1% versus .6% expected helped support Fischer’s comments, while much of the global economy continues to struggle for meaningful gains the US appears to be maintaining a relatively steady growth trajectory. With that we will be looking towards this afternoon’s print for the ADP employment report, the ADP print is often used as a proxy for Friday Non Farm Payroll report and while there is not a direct correlation can provide some colour on the health of the labour market. Also due across the wires this afternoon is the ISM Non Manufacturing Composite which accounts for the service sector in the US, this is expected to have grown to 57.5 vs 57.1 in October. Later this evening we also have the release of the Fed’s Beige Book which will provide a breakdown of economic activity across the US, key ahead of next week’s FOMC meeting.
The euro broke to fresh lows against the USD this morning following weaker than expected PMI data, service and composite readings missed to the downside once again putting pressure on the EUR ahead of tomorrow’s ECB meeting. The continued decline of data puts pressure on the ECB to act, to come good on their promises to do whatever it takes to support the region, yet tomorrow’s ECB meeting is not expected to be the turning point. Thus far the ECB have been experts at talking down the EUR without actually taking major steps towards out and out QE, should the ECB confirm such a QE policy, something that might match the steps taken by the BOJ or FOMC then we would expected additional EUR losses, should the ECB fail to meet markets expectations this week then the EUR may find a short term relief rally. The longer term downtrend in the EUR is expected to continue into next year however.
GBP data has tended to be better than expected of late however the pound has been struggling for meaningful strength following a very dovish inflation report from the BOE in November. Expectations for inflation to fall below 1% have seen interest rate hike expectations for the UK pushed back to the latter end of 2015. Data however has remained firm, Monday’s manufacturing print was better than expected and while we did see some GBP selling after a weaker construction print this morning’s better than expected print of Services and Composite PMI reading bode well for the UK economy. Services PMI expanded to 58.6 versus 56.5, this is a very solid services print covering an area of the economy that contribute over 75% of the GDP figure. It appears the analysts are underestimating the robustness of the UK economy and while inflation is obviously a major concerns, other indicators are more positive.