GBP/EUR 1.2652 (0.7908)
Yesterday was slightly more subdued in terms of risk appetite, banks slid in Europe following a record breaking fines for FX fixing, UBS, RBS and HSBC all face fines while Barclays was also on the slide as it negotiates its punishment for rigging FX markets. Sentiment remained low across indices, a NATO statement claiming Russian troops had entered the Ukraine with tanks and artillery did not help the tone and the DAX declined 1.7% with the CAC down 1.5%, while in the UK the FTSE was down .4%. The tone steadied somewhat in the US Session as stocks ebbed and flowed around record highs, however the S&P and Dow Jones both closed in the red, while the Nasdaq was slightly positive. Asian markets were once again higher, there has been some back and forward on whether earlier elections would delay an increase in sales tax in Japan, speculation is once again favouring a delay in the tax and this has been positive for market appetite with stocks once again on the rise in Japan, needless to say this has put downward pressure on JPY. European stocks have started the day in positive territory, while the EUR is also trading firmer on the open. GBP still finds itself under pressure following yesterday’s inflation report, while overall the USD has been trading relatively neutral. The AUD dropped overnight following comments the RBA may look to intervene causing currency weakness.
The big event of the day was the BOE inflation report, markets had positioned themselves for a more subdued report based on recent data and they were not let down by BOE rhetoric. The headline grabber was the BOE expect a disinflation environment to continue with the likelihood of inflation falling back below 1% in the coming months, remaining below their 2% target for as much as three years. This has seen interest rate hike expectations fall, with the BOE’s first rate hikes not priced until year end 2015 now, almost a full year out from where they were pricing 6 months ago. The slightly more positive aspect was that much of the inflationary pressure is deemed to come from downside price pressures on commodities, while wage price growth has increased and is expected to continue to improve. GBPUSD interest rate spreads are now back to levels they were at in early 2013, when we saw GBPUSD trading below 1.5500.
When data is quiet the pressure on EUR subsides and this appears to be the case once again this week, the lack of any major data releases and more importantly the lack of any further detail on potential ECB easing has allowed the EUR to trade higher. It has benefited against a weaker GBP over the last 24 hours and also the USD which has had little in the way of drivers this week. Mario Draghi spoke in Rome yesterday and his comments were almost a “cut and paste” of previous ECB meeting and comments we are well used to hearing. Draghi highlighted that monetary policy alone was not enough to spur growth, but would play its part. He acknowledged that unemployment was unacceptably high and the larger concern for the region was a huge decline in private investment which was back to levels not seen since the 90’s. This is all old news and as such had no material impact on the EUR, the lack of any detail on potential QE though favoured some single currency strength. German CPI data came in as expected this morning posting year on year inflation of .7%. Later this morning the ECB publishes its monthly report while there are also several ECB speakers across the wires throughout the day.
US data has been light all week and continues to be the case today, a rise in inventories did little to help the USD yesterday and Jobless claims data due for release this afternoon is unlikely to change the USD picture. There are however a large number of FED speakers later this evening including Janet Yellen who has opening remarks at the FED/ECB event. Technically USD has started to look a little heavy and while we certainly have not yet seen any confirmation of reversal, the USD appears to be simply maintaining its position, with plenty of help from weaker counterparts but outright greenback strength appears to be lacking for now.