Yesterday was a time to take a deep breath and take stock of what last week threw at us. Markets took in last Thursday’s meeting from the ECB and the broad reaction was positive for both equities and the euro as the outlook for the Eurozone remains ok. However, entering the weekend there was still considerable caution for global markets as concerns North Korea would once again fire test missiles resolves, while there was also huge concerns about Hurricane Irma. As is transpired NK were on their best behavior and Irma shimmied west to miss Miami and the east coast, instead making its way up the west coast of Florida and while damage and flooding has been considerable, it’s far from the worst case expected, or indeed that experienced by some of the Caribbean islands.
Given how this has all played out, it was not surprising to see yesterday’s markets facing a more bid tone. European stocks pressed higher on the day, however the euro continued to find sellers as the relief from last week’s ECB meeting faded and markets interpretation of Draghi’s comments shifted to slightly more cautious. The USD rallied from lows, helped by the downgrading of Irma and associated risks to the economy which also saw one of the best days for stocks this year with the S&P closing at a fresh records with the Dow and NASDAQ both up over 1%. This sentiment continued in overnight markets as Asian bourses pressed higher while the JPY was also facing selling overnight. GBP continues to find itself in favour, however today’s CPI inflation reading will present some risk for the pound.
We’ve often commented that the GBP has found itself the follower in recent months with most UK data points slipping by with not much more than a cursory reaction, while even Brexit related headlines have had little impact. GBP’s direction has really been dictated by BOE expectations and as it stands we are not expecting the BOE to act in any direction any time soon, hence GBP direction will more likely be dictated by cross currency it’s exposed to. However, today the pound may see some love, the CPI inflation reading is expected to show price growth rise to 2.8% from 2.6%, with the core reading rising to 2.5% from 2.4%. Inflation is arguably one of the biggest data points markets are watching in relation to BOE expectations and should we see confirmation that inflation is back on the rise in the UK, then it will likely provide some scope for additional GBP appreciation.
Overnight, news filtered through that the UK Government had passed its latest Brexit bill, although we remain in the very early stages of discussion and are likely to face considerable negotiations and potential revolt in Parliament as these continue. Still, it’s a step in the right direction and GBP is above .3% stronger this morning for it.
We are light on data from the Eurozone and the US today. We had a number of hawkish ECB members across the wires yesterday however their comments carried little weight into the Euro and the single currency continued selling throughout the day. As mentioned yesterday, attention will now be sharply on the Eurozone and its economy, we’ll be looking at a speech from the ECB’s Vice President Constancio for any indication on concern on Euro strength. The ECB will eventually have to scale back easing and reduce QE, that’s a fact, and currently there is little reason for them not to as the Eurozone continues to perform admirably. However, QE has not resulted in the improvements in the economy that one would expect, banks continue to capitalise while lending lags, however should the ECB remove easing, can the Eurozone support itself?
There’s not much from the US today so news flow will be closely watched and we’ll be looking to access the scale of impact of Irma on the US economy. EURGBP is sitting at its crossroads, we highlighted the pair wanted to get down towards .9060/70 area and we’ve been sitting there throughout the last 18 hours. A break below this region should see EURGBP progress towards support between .9010/30 area, however a break sub .9000 and it would confirm a bearish shift and we’d be looking to see EURGBP track back towards .8750 area in the coming months. GBPUSD is in the rise, 1.3226 provides initial resistance while July’s highs at 1.3268 provides opportunity for GBP sellers above. 1.3135 provides and area of support. EURUSD likely just holding a range between 1.1950 and 1.2100 with a break to the downside then targeting 1.1863.