GBP/EUR 1.1911 (0.8397)
The cat clearly got ECB president Mario Draghi’s tongue yesterday as he mixed up the age old saying but that was the most excitement from yesterday’s meeting. October’s meeting was a replica of the September announcement, as the ECB opted to keep interest rates on hold at .50% and announced no new non standard measures. The EUR was little changed on the announcement which led to the press conference where volatility usually picks up.
Draghi again repeated the recent ECB mantra, that inflation risks are broadly balanced, the ECB remain cautiously optimistic with growth in line with ECB assumptions, yet the ECB remain ready to act should the situation deteriorate. They have left all options on the table, a rate cut was discussed (in January this would have been enough to send EURUSD down 100 pips) but Draghi said they have an array of instruments they could use including further LTRO operations.
He was specifically asked a question about the euro’s value, and whilst being deliberate and diplomatic, his response would suggest he’d like to see it lower. All in all there was very little new from the ECB yet EURUSD rose 90 pips during the press conference, which coincided with the stand in Italian PM’s vote of confidence, which passed without fan-fair. This is more than likely the reason behind the pick up in EURUSD, which reached fresh 7 month highs yesterday.
There is no doubt the pound has enjoyed a very solid run of late, up over 7.9% in the last three months against the USD. Much of this has fed through via a pick up in bond yields as the UK data shows continued signs of improvements and markets begin the price in rate increases sooner than the BOE have guided.
PMI data released yesterday and Tuesday has knocked some of the shine from GBP, although certainly not enough to reverse the recent trend. Yesterday’s construction PMI came in lower than expected, following on from Tuesday’s manufacturing PMI miss which should make today’s Services PMI reading slightly more important. Should we see another miss in the UK’s largest employment area we may see GBP selling accelerate. No change is expected however, but we will be keeping a close eye on this release.
Elsewhere the government shutdown in the US continues with no resolution in sight yet. We are viewing this now less as a threat to stability but as a risk to taper. The implications of the government shutdown will feed through the economy, some 800k workers have been forced on unpaid leave and this is likely to be seen in data released in November/December – raising concerns on whether or not we will see tapering begin before year end.
The ADP employment report released yesterday was worse than expected with 166k jobs added to the economy in the month of September, versus 180k expected. If this was a true non farm payroll day, the reaction, and sell off in USD may have been more aggressive. Should we see the shutdown continue we’d expect to see the USD trade firmer against EM currencies, whilst struggling against its more liquid G10 counterparts.
Today sees a host of PMI data from the Euroszone, already released this morning we saw services PMI’s beat expectations in France and Italy, while the German reading was worse than expected. Overall the Eurozone composite services reading was stronger than expected posting 52.2 vs 51.5. later in the morning we are also expecting Eurozone retails sales, forecast to have risen .2% in August, although showing a year on year decline of 1.5%.
The US session brings us jobless claims and the ISM non manufacturing composite index. The bigger picture in the US will be budget negotiations and a host of Fed speakers from mid-afternoon into tonight.