GBP/EUR 1.2680 (0.7905)
Global markets were supportive of risk through the second trading session of the week as both European and US equity markets experienced gains. The lack of any further escalation in tensions between Ukraine and Russia gave markets the opportunity to claw back some of last week’s declines as European markets rebound from three days of losses. The USD rallied to its highest level in over a month, helped by breaking to a fresh 8 month and 2014 low versus the EUR, while the AUD has been the strongest performing currency of the G10 in the last 24 hours. The Aussie found support overnight as inflation prints confirmed price growth remains steady and markets pared back further interest rate cut expectations.
Data has been quiet from the UK thus far this week but that will change this morning. GBPUSD has been pulling back from recent highs below 1.7200 in the last couple of weeks, while the weak EUR has seen EURGBP drop close to fresh two year lows having tested below .7900 at times yesterday. Where the pound goes from here will depend on the outlook for interest rate hikes and with that today’s release of the MPC minutes from their July meeting may shed some further light.
Markets have been pricing in rate hikes from year end (although not fully), and BOE governor Mark Carney has been anything but clear offering mixed views in recent weeks. Having previously said markets were underpricing the possibility of a hike, Carney then stood back from the comment suggesting rates would only rise once “spare capacity” had been filled, followed by our favourite BOE mantra that any rate increases would be “small and gradual”. Markets will be looking to the voting of the MPC members, previous votes have been unanimous, members voting 9-0 to keep rate on hold at all time lows of .50%. Any shift in this voting is likely to be supportive of GBP, even if only one member has changed their stance.
The EUR continued its slide yesterday dropping through key 1 year up-trend support and falling to fresh 2014 lows. The break of previous 2014 lows around the 1.3480 mark have opened the door for a larger move back towards 1.3300. This is in line with our calls from the start of summer as FED and ECB policy diverge. The greenback is not the only currency the Euro is struggling against as it falls close to two year lows vs the pound. We may see a small bounce here should UK interest rate hike expectations subside. Eurozone consumer confidence data crosses the wires later but is unlikely to carry to much weight for the single currency.
The USD rallied to a monthly high yesterday, what was interesting in this move was the fact markets had returned to seeking risk, yet the safe haven USD still advanced. Yesterday’s inflation readings were as expected at 2.1%, which drew mixed reactions. Inflation reading from the US has tended to surprise to the upside, the previous reading was at 2.1% as well so perhaps there was some disappointment in the lack of advancement in price growth. Existing home sales grew, however housing in the US is taken as a very important indicator so the rise of 2.6% from an expected 2% bodes well for the US recovery and continues the run of strong housing data we have seen.