GBP/EUR 1.2525 (0.7982)
Last week saw equity markets take on all time highs in the US with the Dow closing in record territory once again and the S&P breeching another intraday high level. The boost in risk appetite in the US since Yellen and FOMC testimony struck a more dovish tone has seen increased demand for return verse all time low interest rates, while also putting the USD on the back foot as interest rate hike expectations remain subdued. The positivity in risk markets has seen global equities also in demand with the Nikkei trading towards 5 month highs as Abe fires his third arrow.
We remain cautious of this positive risk environment particularly with geopolitical tensions remaining fragile in Ukraine/Russia, as well as through Iraq and Syria. Insurgents continue to gain traction and now political posturing between the US, UK and Iran can cause its own issues. In the Ukraine fighting continues despite ceasefire talks, while the US and Europe have threatened further sanctions if we do not see a de-escalation of the situation.
Getting back to the fundamental data and in Europe the big picture remains ECB easing, with particular focus on its potential asset purchase program. We’ve been saying all year that the ECB is very unlikely to begin such purchases until the bank asset quality reviews have been finished and this certainly continues to look to be the case. The EUR managed to find a firmer footing last week, the absence of any real data points to drive negativity and no further news on any asset purchase program, as well as a firmer risk environment helped lift the single currency, which managed to lift itself from post ECB lows against the USD to trade back above the 1.3600 handle.
The Euro has plenty of event risk this week however and already we have seen it struggle this morning in the face of weaker than expected PMI data from France and Germany. Both countries manufacturing and services PMI figures were well below estimates. Later in the week we have consumer confidence data but for the most part focus will be on ECB rhetoric. With that in mind we look at scheduled speakers with ECB Vice President Constancio and board member Merch due across the wires today. Traders are looking for comments on mechanics or timing of the ECB QE program, anything on this is likely to see increased EUR selling.
The pound was one of the strongest performing currencies through last week as markets continue to absorb Carney’s rate hike comments but data, although light, still showed signs of a slower UK recovery than we saw through last year. Comments over the weekend from BOE member Miles also slightly contradict Carney’s comments.
Miles said that slack remains in the economy with low wage growth one of the key indicators of this, he said low rate stimulus does not need to be removed right now and with inflation currently below the 2% target he does not see BOE policy normalisation until his last year on the MPC (2015). Obviously there is some dissension in the BOE on rate hike timing. GBPUSD remains above 1.7000 however and while this level hold there is still potential for further upside, especially with Carney due to speak in London tomorrow.
The USD has struggled through the last week on a positive risk environment which saw it lose ground against most of its major counterparts, as well as comments from Janet Yellen suggesting rates are likely to remain accommodative well into 2015. The US calendar has a little more action on it today with existing home sales data due for release alongside June manufacturing PMI data. US data has continued to improve and has generally been firmer than analysts estimates, a firmer housing environment with a boost in manufacturing may well see the USD shake off some of last weeks post FOMC weakness.