GBP/EUR 1.2607 (0.7931)
Yesterday’s session was stereotypical of summer markets, volumes still lagged despite the US returning from holidays while stocks in Europe and the US faced selling pressure in advance of Q2 earnings season, as traders and investors alike look to lock in profits on recent record rises. The lack of major data flows or central bank speakers added to the lacklustre environment.
The prospect of interest rate increases in the US may also have dampened investor appetite somewhat but the reality is that unless the benchmark issues in the US start offering far higher yields, equities are likely to be favoured by investors. The USD was a benefactor on two fronts yesterday, the slight shift away from equities helped the greenback, as did the prospect of rate hikes following Thursday’s strong jobs figures.
One of the more notable performances yesterday, or lack of, was the decline in GBP which lost ground to almost all its major counterparts. While the slide certainly wasn’t representative of a change in GBP sentiment, the broad based decline was likely another example of traders taking profits on the recent surge in GBP, ahead of event risk this week.
This leads us nicely into today’s releases where we are expecting manufacturing and industrial production figures from the UK. Our regular readers will be aware that we feel GBP bulls have priced perfection into the pound with rate increases all but priced in for year end, this means that GBP bulls are fighting hard to maintain the pound’s strength in the face of data that on the whole has been to the downside of expectations since April. So far the bulls have been winning the battle with lower data failing to impact the pounds run, but with the pound at overbought levels pressure is mounting should data continue to be below par.
Industrial production data is expected to have added .3% through May, bringing the year on year figure up to 3.2% from 3%. The strongest reading since January 2011. The manufacturing production print is expected to remain unchanged through May showing growth of .4%, with a year on year increase to 5.6% from 4.4%. Anything in line will likely see GBP bulls pushing GBPUSD back towards recent highs around 1.7170, with EURGBP testing lows back towards .7920. The NIESR GDP estimate is also on tap this afternoon with the May print showing .9% growth, it is unlikely to have deviated much through June.
The European calendar is light on data today with the major releases already out of the way, German exports and imports both declined by more than expected while the current account balance slipped to 13.2 bln from 16.9bln through May. This has not helped the single currency this morning as it has given back much of the ground it gained through yesterday vs GBP and USD.
The lack of data leaves euro watchers looking towards comments from ECB officials. Thursday’s meeting provided little detail on ECB QE, and if anything threw up more questions on the TLTRO program. As always any discussion on a potential asset purchase program from the ECB will generate EUR selling but the longer this is held back, the more opportunity the single currency has to claw back ground. Yesterday we saw some comments suggesting that while the ECB is prepared to use wide scale asset purchases, it will do so only if drastically necessary. Further comments like this can only be EUR supportive as it will cause markets to scale back QE expectations accordingly.