GBP/EUR 1.2691 (0.7880)
Yesterday saw markets return to somewhat more normal trading conditions in Europe, last week’s Scottish Independence referendum took most of the attention on the week and many of the data releases played second fiddle. The return of broader focus saw European stocks decline by the most in three weeks following comments from the Chinese finance minister, which dampened speculation his government would boost economic stimulus. Better than expected PMI data from China overnight supported these comments, the better Chinese data helped boost the AUD from near seven months lows against the USD. The EUR was under pressure through trading yesterday as Mario Draghi commented in front of European Parliament that the ECB remains ready to “use additional instruments” to combat low inflation and sluggish growth. The USD remained well supported through yesterday’s session despite some mixed housing data.
GBP was one of the out-performers through yesterday’s session, advancing against all major counterparts as risks to the currency subside. There was very little in terms of major event risk for the pound, however with the Scottish independence referendum now behind us focus will return to interest rate expectations and the BOE’s timing for rate hikes. Last week’s employment data went under the radar and further UK data remains light this week, with lending data the highlight of today’s UK release calendar. Mark Carney speaks in Wales on Thursday and with focus back on UK rates, any indication on the timing of rate hike carries the ability to move GBP currency pairs.
EURUSD managed to trade to fresh 14 month lows yesterday while EURGBP managed to hold below .7900, despite this the EUR managed to recover some ground in the last 24 hours with EURUSD trading back towards 1.2900 this morning. The headlines for the Euro were not flattering, comments from Mario Draghi should have seen increased downward pressure on the EUR and the EURUSD low occurred while he was speaking, but follow through on EUR weakness was limited. It is clear to the market that the Eurozone is struggling, inflation remains well below target, growth continues to be subdued and the ECB have promised further easing if required, much of this has been priced into the current low EUR levels meaning data releases carry less weight unless they are changing the status quo.
This bring us to the preliminary set of flash PMI’s for the Eurozone, the manufacturing, services and composite reading all came in marginally lower than expected, the composite reading posting 52.3 vs 52.5. Overall the data was worse than expected but the theme remains the same and we know the ECB stands by ready to act. The fact that the German services print was considerably stronger than expected posting 55.4 vs 54.3 has been enough to lift the EUR this morning, it is now trading higher against almost all major counterparts.
The improving state of the US economy and the reduction of the Feds QE policy has seen the outlook for the USD improve dramatically over the last two months. The next step is for the Fed to discuss rate hikes and although last week’s FOMC suggested rates are to remain accommodative the Fed is beginning to move the opposite direction to other major central banks. Only the BOE appear to be on a similar path at the moment while Europe and the ECB have promised further easing if required, and in Japan Abe continues with loose policy. The USD also has the benefit of a haven status, rate increase expectations have boosted the USD so far but should we see a liquidation of risk or a sell off in equities the USD is likely to benefit further.
Housing data released yesterday saw existing home sales decline 1.8% through August, while the Chicago Fed activity index also declined, down .21 vs a positive .33 expected. The USD may well take a breather on rate hike moves after last week’s FOMC but should fear return to markets the greenback still remains poised to advance. Several Fed speakers highlight today’s docket as well as manufacturing PMI date expected to rise to 58 from 57.9 in August.