Risk appetite found itself well supported through much of the session after a positive close in Asian markets helped Europe into the green from the off yesterday and this rally was spurred on by stronger than expected earnings. The stronger sentiment carried into the US session with major indices closing higher across the board. Once again firmer earnings playing their part with the Dow closing at 22,000 and fresh record highs once again, while S&P and NASDAQ both traded higher on the day. The USD was also up from the lows despite some weaker than expected manufacturing data, partly helped by slightly firmer PCE core reading at 1.5% vs the 1.4% expected, the Feds benchmark for inflation slightly firmer than expected. GBP held firmer on the day as well following slightly better manufacturing PMI data, however GBPUSD was range bound as was EURGBP, while EURUSD moves high held at 1.1850. Overnight was a similar story, risk remained positive and major currency pairs range bound.
The dislocation between European and US markets has been interesting, European indices have posted two straight months of losses while in the US we see fresh record highs on an almost weekly basis. Their respective currencies have been going opposite directions with the euro up over 12% this year (weighted) while the USD index is down 10%. Eurozone data has been steadily improving throughout the year, while in the US data has been inconsistent and showing some signs of slowing with GDP revisions revised lower through the year. The big question everyone is asking now is what is next?
The Eurozone has certainly seen improvements in data over the last year but the ECB are the first to say this has been a result of ultra-low interest rates and their asset purchase program. Removal of this stimulus will leave the region once again exposed to downside risks, something the ECB will not be willing to do at this juncture, especially after witnessing the slowdown in the US on the back of three hikes, but markets will likely have to wait until September before they get any real information from the ECB and that means any euro selling will need a different catalyst.
The data calendar is light today but this morning GBP will be looking at the Construction PMI print. Although a further slowdown in output is expected anything firmer will only support GBP, especially with markets focused on tomorrows BOE meeting. The reality is however that sterling pairs will likely find themselves focused on the recent ranges, any breakout will likely be limited ahead of tomorrow’s meeting. EURGBP focused on the .8995/.8980 down to .8920/8890. GBPUSD finds resistance ahead of 1.3245, with support just below 1.3200.
ADP employment report highlights the US session and provides the usual guidance ahead of Friday’s NFP figures. US labour market data has been somewhat volatile but last month’s print was far better than expected and should we see the ADP employment report print in excess of 200k today (expected 185k), the greenback may just have some scope to rally. EURUSD continues to find sellers in rallies 1.1850 area with further resistance around 1.1870, while 1.1795 holds moves lower for now.