GBP/EUR 1.2187 (0.8206)
The tone through yesterday’s trading session was negative overall, stocks in Europe traded lower for the second day in a row while US stocks followed their lead lower. The USD was one of the worst trading currencies, losing ground to almost all its major counterparts as it finally broke its tepid trading range to reach its lowest level since October. Stocks have opened the day lower and there has been little change overnight on the currency front with the exception of NZD which declined after the RBNZ Governor Wheeler suggested there may be intervention to halt the appreciation of the currency should it damage growth prospects.
The depreciation of the USD has pushed some currency pairs to notable levels, as EURUSD approaches the 1.4000 level calls for ECB action intensifies. The OECD have even weighed in on the argument as it released its Economic Outlook. Whilst revising up its Eurozone growth prospects to 1.2% from 1% last November, they also called on the ECB to take policy actions to move inflation decisively towards its 2% target, warning the inflation could turn to deflation.
The list of those calling for ECB QE is long, from certain ECB members to foreign governments, the IMF and now the OECD amongst others. The ECB are due to meet tomorrow and although we expect no change in policy calls for ECB action have never been greater. We have long felt that the ECB are unlikely to conduct any bond buying until after the asset quality review of European banks is complete.
This puts the ECB in a difficult position, they are facing increased calls to act to tackle the low inflation environment yet growth signs from the region are improving. Yesterday’s release of services PMI data from the Eurozone showed positive signs, the composite figure for the region came in as expected, Spanish, French and Italian data was all firmer as were Eurozone retail sales which grew .3% versus expectations of a .2% decline. If anything we feel the largest risk from tomorrows ECB meeting would be a cut to the interest rate or deposit rate but this is an extreme. Today’s calendar remains light with only retail PMI’s on tap this morning and unlikely to have any major impact in the single currency.
The outlook for GBP continues to improve ahead of tomorrow’s BOE meeting. Gilt yields would suggest the market is now pricing in a rate hike before year end following yesterday’s better than expected services PMI printing 58.7 vs 57.8 bringing services sector growth to its highest level since last November. The OECD have also upgraded their UK growth forecast for 2014. While we expect no change from the BOE tomorrow any indication of dissension amongst MPC members may see GBP rally further and gives GBPUSD opportunity to go to 1.7000.
The USD just can’t seem to find any reason to rally. Equities sell off, so does the USD. Jobs data far exceeds expectations the USD sells off. The Fed continues to taper and the USD see’s little benefit. Even the rally in short term treasury yields has little impact on the USD as it struggles to find strength. The reality is the lag on growth from Q1 and lower than expected inflation figures has put pressure on the greenback and pushed back interest rate hike expectations.
The dollar may get some reprieve later in the day as the spotlight turns to Fed Chair Janet Yellen, who is scheduled to testify before the Joint Economic Committee of Congress on the outlook for the US economy and monetary policy direction. Markets will be focused on the continuity of the Feds taper, and any indication on timing for interest rate increases. Fed commitment to policy normalisation should support the USD, but is unlikely to see a reversal of the prevalent negative USD story.