GBP/EUR 1.2154 (0.8230)
Equity markets remained mixed yesterday with little major change across the globe. The FTSE and CAC were both less than .1% lower while the Dax was up .1%. US equities were lower on weaker than expected earnings releases and a slight shift to a risk off environment. Overnight in Asia riskier assets continued to struggle with equities in the region also lower. We mentioned yesterday that the USD Index was close to a breakout having traded in a narrow range, there was a somewhat bearish move in this regard, USD selling driven by increased AUD demand overnight. We still maintain our position for a stronger USD, unless taper expectations are pushed back.
Since last July GBP has been the strongest performer in FX markets having had a shaky first half to 2013. Since then the UK economy has exceeded expectations and guidance for growth, the IMF yesterday upgraded their 2014 growth outlook for the UK to 2.4% from 2.9%, the BOE’s 7% unemployment threshold gets ever closer and interest rate increase expectations have moved from 2016 to late 2014. The fact is this run cannot continue indefinitely, but as long as the BOE maintain their threshold at 7%, GBP rates will continue to rise and help sterling.
This brings us to today’s action from the UK and one of the FX markets best runs could come to an end, or find further fuel to rally. Unemployment is expected to fall to 7.3% today and any print in line or better than expectations is likely to give GBP a nice lift until the BOE minutes can be dissected. Both releases are at 9.30 and while we expect the usual unanimous vote for rates to be held at .5% and the asset purchase target at £375 bln we will be looking for any indication of a lowering of the unemployment threshold, or concerns voiced on rising rates impacting the pace of growth. GBP positioning would suggest the status quo is towards a rate hike, anything to dampen this leaves GBP exposed to heavy selling.
The apparent bottoming out in the Eurozone has seen significant capital inflows, as discussed yesterday, the regions low base interest rate environment and higher yielding government bonds (with apparent relative security) make it an attractive proposition for investors but can leave investors in the region over exposed should conditions change. Three month Euribor rates have risen to a 16 month high and there remains serious growth concerns, with the ECB still vocal on possible stimulus (if required) the Euro still remains volatile.
EURUSD ranges discussed yesterday remain in play with short term support ahead 1.3500 and this week’s highs just above 1.3575 capping moves higher. January highs at 1.3700 should hold any move.
GBP found some buyers yesterday ahead of today’s data, helping it to push EURGBP lower, and testing long term support at .8220. In fact we did see a break of this level towards .8215 but it failed to close the day below. A break and close below .8220 today should see us move towards .8100. .8385 is likely to cap any moves higher should we see a change in BOE policy.
GBPUSD broke above the weekly highs but failed to challenge the 1.6500 levels, with multi year highs above 1.6600 a very firm selling region for GBP.