GBP/EUR 1.2300 (0.8127)
Risk appetite remained tentative in yesterday’s trading session. In Europe stocks traded relatively flat following five successive weeks of gains. In the US equities reversed early losses to close the day flat to marginally higher, but still back from recent record highs. The JPY was a benefactor of the lack of risk appetite as it achieved its strongest level against the USD in three months. There was little movement in EUR or GBP crosses ahead of event risk today, while the Aussie (AUD) was one of the biggest single losers across the board as rumours of a cut from its AAA rating circulated followed by the RBA minutes suggesting they would be looking to maintain record low interest rates for the time being.
Today has a lot more to offer in terms of event risk, with an active calendar likely to stir some interest in recently popular currency crosses. The UK has the cream of data releases this week and it leads the charge today with the release of the CPI reading for April. The year on year figure is expected to rise to 1.7% from 1.6% in March, with .3% growth through April alone. UK data has been to the low side recently and last week’s inflation report saw some traders pull back the rate increase expectations.
Today’s inflation reading can do two things. A reading as expected or firmer may see some of that spare capacity in the economy covered, any move back towards the BOE’s 2% inflation target will be taken as positive for those looking for the BOE to raise rates sooner rather than later. The pound is back from recent 5.5 year highs against the USD but still trading at levels last seen in 2009. EURGBP is hovering just above recent annual lows, this suggests that their remains a lot of positivity priced into sterling crosses so anything on the lows side should see reactionary selling. So far this morning GBP has been rallying with GBPUSD looking to test towards weekly highs, while EURGBP is testing recent lows towards .8130.
The US calendar is quiet but that does not mean the USD will get a free pass for the afternoon as there are several Fed speakers on the docket. Heads of the Philadelphia and New York Fed, Plosser and Dudely, both voting members of the FOMC are due to cross the wires. The central themes will be the economy and monetary policy and as the USD outlook is heavily dependent on a continued taper and subsequent rate increases that will eventually follow, any indication to the timing of rate hikes has the ability to increase US volatility. Q1 certainly knocked the USD as growth was far below expectations but as data from the US has been firmer through Q2 any comments from the Fed members supporting this improved view is likely to be supportive of USD.
There is little data from Europe and with much of the ECB weakness already priced in further rate cuts/policy actions comments are having little effect on the single currency. Instead today the EUR is likely to be pulled by external demand for GBP and USD given the larger event risk in these currencies. EURUSD lows around 1.3660 offer support, while weekly highs around 1.3735 offer resistance.