GBP/EUR 1.2150 (0.8231)
The European session saw risk turn around yesterday with a slight shift towards “risk on” helped by a pick up in M&A activity with health giant Pfizer looking to pay $99 bln for UK drug manufacturer AstraZeneca. The news helped GBPUSD break to fresh 4.5 year highs above 1.6850 but gains failed to hold as the pair retraced back towards 1.6800. Better than expected Housing data from the US helped the tone remain positive through the evening session. Not surprisingly Russian stocks declined as further sanctions were imposed on Russia. Overnight the Asian session has been relatively quiet, Japanese markets were closed for holidays and the calendar remained light elsewhere.
We have a very busy calendar today and first on the docket is the first print of UK GDP for Q1. With this release on tap and GBPUSD just off multi year highs we are primed for a fresh breakout but again there is a lot of positivity priced into the pound at this level. GDP is expected to have expanded by .9% through Q1, bringing year on year growth to 3.2%. Mark Carney has been speaking this morning and said he see’s the UK economy back to 2008 levels, growth has exceeded expectations yet there remains considerable slack in the labour market, when rates eventually do rise they will be gradual and limited.
The key for GBP is in UK interest rate expectations, already this morning UK gilt yields are on the rise and this is once again pushing GBPUSD towards 1.6850. Needless to say any release above .9% will see GBPUSD progressing rapidly towards 1.6900, which will be a continuation of the medium term trend in this pair. We’ve often commented that there is little room for bad news priced into GBP pairs so we remain weary of any downside surprise and with the FOMC due tomorrow night, and Non Farm payrolls from the US on Friday we may be seeing another medium term top carved out in GBPUSD today.
Despite all the ECB’s vocal intimidation the EUR remains bid with EURUSD pushing back towards highs above 1.3900. The strong Euro is causing problems for the ECB and their growth and inflations outlooks, they have made no secret about this but the market looks set to force them into action. Any further high alerts a more detailed analysis of a potential QE style program from the ECB will surely knock the Euro, but only complicit action will reverse the strong Euro trend.
With that in mind we have German CPI inflation data set for release this morning with deflation expected through April at -.1%. Although the year on year figure remains at 1.3% EU harmonised. The Eurozone figures are set for release tomorrow but unless these are very weak we still cannot see the EUR changing its recent course without ECB action as peripheral yields still see capital flowing into the region as investors look for returns. Consumer confidence data is also due for release today but unlikely to carry any major policy implications so any reaction will be sort lived.
Risk trends have been mixed and the USD’s performance remains somewhat tepid. US treasury yields have been on the rise but the problem for USD pairs is the Eurozone and UK rates have also been on the rise meaning the greenback is struggling to achieve any meaningful gains on that front. With two major pieces of event risk for the USD we are unlikely to see too much participation in dollar trading until post FOMC tomorrow evening, with non farm payrolls then due on Friday.