GBP/EUR 1.2696 (0.7877)
Global markets remain tentative ahead of the FOMC minutes for September, due for release this evening. In Europe, equity markets slumped to a seven week low following further data indicating a slump in the core, Germany, where industrial production contracted by the most in five years. In the US, equity markets declined to eight week lows following a warning from the IMF, who cut their global growth outlook. On the currency front the EUR slid against most of it majors peers although the slide was limited and we have already seen the single currency trade moderately firmer this morning, while in overnight trading the USD outperformed against most EM currencies as well as higher yielding currencies like the AUD and NZD.
The rally in the USD overnight, as much as .3%, was limited and appears to be more of a corrective rally following selling through the opening session. EURUSD and GBPUSD have both traded within a 100 pip range in the last 36 hours with USD trading appearing relatively neutral ahead of this evening FOMC minutes release. The interpretation on the September meeting was broadly hawkish, some stronger data points, particularly impressive growth through Q2 has seen increased calls for the Fed to act sooner than expected in raising rates, for the first time since 2006.
The USD has already rallied 2.6% since the September Fed announcement, on top of a further 4.6% advance preceding the August meeting, this would suggest that a lot of the hawkishness from the Fed has already been priced in to the USD, should the minutes fail to add anything new to the hawkish argument, such as sooner than expected rates hikes following the end of QE3 this month, the USD rally may run out of steam. The trend of a stronger USD is likely to continue into next year, however in the shorter term without additional catalysts the USD rally is showing signs of running out of steam.
There were several meaningful releases from the UK over the last session but they did little to drive GBP in any meaningful direction. On the plus the NIESR GDP estimate for September printed a consistent .7%, with an upgrade to last month’s print to .8%, while manufacturing production also grew at 3.9% year on year, better than the expected 3.4%, boosted by upward revisions to the July figure. The industrial production print was less exciting, stagnating at 0%., while elsewhere the BOE’s survey of credit conditions showed demand for mortgages dropped significantly. There is little on the wires from the UK today and GBP pairs are likely to remain relatively tight ahead of tomorrow’s BOE’s MPC meeting and policy release.
Despite several concerning data prints and an IMF warning that more must be done for the Eurozone, the single currencies losses were limited. The IMF stated the Eurozone is facing a 40% probability of falling back into recession with a 30% chance of declining to full on deflation. Many analysts believe the IMF is behind the curve and on the low side of probabilities which is even more concerning for the region, yet the EUR has advanced against the pound in the last 48 hours, while also holding well above Fridays lows against the USD. The Eurozone is almost the opposite to the US on many front, not just central bank policy outlook, there has been plenty of bad news priced into the single currency and while there is likely more to come, in the shorter term the single currency is managing to hold its head just above water. Eurozone data remains light today and most of today’s focus will be on this evening FOMC minutes release.