GBP/EUR 1.1847 (0.8440)
Riskier assets have found themselves relatively well supported despite the potential for western intervention in the Syrian crisis. We mentioned yesterday that we did not feel an all-out attack or occupancy would be a likely outcome and markets certainly do not appear to believe current geopolitical tensions are a threat to global stability. Equity markets have continued higher from Friday, with Asian markets over night posting their longest streak of consecutive days gains following stronger than expected industrial production and retail sales from china.
Some of this boost in riskier assets has fed through from Friday’s weaker than expected jobs figures, the rationale being that the Fed are likely the reduce their current bond purchase program by less than expected, meaning markets will still have access to cheap money. We remain very cautious on this view and despite Friday’s figures disappointing, the overall trend for the jobs environment has been positive, the unemployment rate has fallen ( admittedly due to people leaving the workforce as opposed to finding employment) and the US is on a path to gradual recovery – conditions are still suitable for the Fed to begin their taper and we still expect a small reduction in September. All of this has not been supportive of the USD and it struggled yesterday under selling pressure.
The EUR had a stronger day yesterday and this helped EURUSD claw back some of its post ECB losses. The small bit of data from the region far exceeding expectations, the Sentix investor confidence survey posted 6.5 vs -3.5 expected, up from -4.9 in August. This posted the highest reading since May 2011 and provides further indication that we have seen a bottoming out in the Eurozone, with signs of peripheral improvements. The region may have bottomed out but finding a meaningful path to sustainable growth is going to be the major challenge from here, particularly as political instability and austerity continues to hamper the region.
In Italy the senate’s debate on whether to expel PDL party leader Berliusconi passed by without any conclusion. They will meet again to discuss this evening as the PDL continue to threaten to bring down the coalition government in place in Italy. European data today comes in the shape of Italian GDP figures for Q2, this is the final reading for the estimate so should not deviate from the previously reported -.2%.
GBP has continued its march higher against the greenback, admittedly yesterday progress above 1.5700 was more to do with USD selling than any GBP strength. The pound has had a very good run over the last month and although we do expect data to continue to improve we feel that much of the positivity has been priced in. We know the BOE have certain guidelines in place to help guide policy; tomorrow employment figures will be closely watched but have the potential to disappoint as markets build expectations for a UK recovery.
EURGBP traded below its firm 2013 support around .8400 very briefly on Friday. Its failure to accelerate lower from here and in fact reversing back higher above .8425 suggest we may have to wait for further fundamental support to break down EURGBP. For now the range remains consolidative between .8400-.8450.
EURUSD traded as low as 1.3100 last week but the selloff in USD post NFP has brought this pair back up above 1.3200. We still see the US favouring progressive tapering which should favour the USD and with the ECB favouring downside risks to interests rate in the Eurozone we’d like to see the 1.3100 level tested again in the next couple of weeks.