Yesterday was the calm before the central bank storm and on the day we saw a slightly firmer EUR, neutral USD and a weaker GBP. A late recovery into the US close helped the USD index cover early losses and close slightly higher, while GBP was broadly weaker following weekend headlines on Brexit, as well as some caution around BOE on Thursday and of course EU meeting’s on Thursday and Friday.
There was a brief bout of risk aversion through mid-morning (but nothing too noticeable) following reports of a terrorist attack in New York, however markets quickly recovered and demand returned. In equity markets the firmer euro was not helping European stocks which faced some selling with the pan European Stoxx 600 down .1%, while the opposite was true in the UK with the weaker pound adding to FTSE demand. NZD was also an out-performer yesterday, it had started firmer footing following confirmation of Adrian Orr as the RBNZ but gains have accelerated overnight which has also helped pull AUDUSD higher while USD demand has waned somewhat with the USD trading lower to welcome in today’s session, the greenback down almost .25% from its overnight highs.
We highlighted yesterday that GBP would almost certainly face volatility through the week with major data due across the wires, CPI inflation is the high point of this morning’s releases. There is also ongoing Brexit headlines, the BOE on Thursday, as well as a sit down with the EU later in the week. With all this weighing, sterling started the week on the back foot and it was not helped by comments from UK PM Theresa May. For many, May has been towing a very fine line and her job of keeping multiple interested stakeholders happy is virtually impossible but Brexit talks continue to be one step forward and two steps back (certainly in GBP terms). Yesterday May added to early GBP selling suggesting that any divorce settlement would be off the table if negations did not go the way they wanted. Perhaps this is May’s approach to game theory. Her way of trying to show those in the UK, who both voted for Brexit and to remain, and those outside in the EU and to the wider world that she is ready to negotiate but will not be a push over. She almost said as much in Parliament yesterday saying that progress on the boarder issues was beneficial to all, those who voted for Brexit will get the Brexit they wanted and those remainders who want a smooth process will be aided by this progress and move on to trade talks and let the EU know that the UK can be conciliatory on some issues, but unless they get what they want there will be no deal at all.
CPI inflation headlines this morning’s calendar for the UK and is expected to remain at 3% for the 3rd consecutive month. The risk to GBP is likely to be a slightly weaker print given the transitory factors in inflation and the rise in the value of the pound from this time last year, we’d expected to see some impact on inflation. A miss to the downside will almost certainly see GBP selling as it removes any prospect of the BOE hiking rates again and in fact could open to door to rate cuts into next year should the UK economy slow down any further.
EURGBP looks to have resistance above .8845 up to .8872 area. While support lower is back as last week’s lows below .8700. GBPUSD will likely find sellers in any rally towards 1.3500, while 1.3320 offers support, a break below there could see a move back towards 1.3220 quite quickly.
German ZEW investor sentiment headlines the European economic calendar this morning. A slight diminishing of sentiment is expected but to be honest its hardly going to make too much difference to the euro either way as this reading is not going to see the ECB shift their policy in any way, we are still waiting to finish the current asset purchase program, and the new extension in to September next year has a long way to run. This leaves the euro open to other forces and for now the single currency is on the rise. Its largest counterparty in the USD however may have something to say about that this week, with the Fed expected to hike rates tomorrow, up another 25BPS. There is very little in the way of key data from the US today and as such risk sentiment may well be the primary driver as EURUSD prefers to consolidate ahead of tomorrow. EURUSD support at 1.1764 is the first level to hold any move lower, while and move towards 1.1700 should find some demand. 1.1814 offers some light resistance to moves higher.