GBP/EUR 1.2130 (0.8244)
There is still a hangover in markets from last week’s Non Farm payrolls in the US, despite being only marginally lower than expected the reaction to EM currencies and the USD indicates markets took this as a bad figure. The USD has faced three days of selling, EM currencies have rallied against the USD and equities are in the red for the week thus far. The lack of action from the ECB last week has seen EUR resume its own post ECB lull, and two weeks of weaker than expected data from the UK was wiped out by better than expected prints in industrial and manufacturing production yesterday.
First up we’ll look at GBP which was one of the most notable out-performers versus the USD, but across the board the pounds performance was not as impressive as its 150 pip move against the greenback might suggest. The pound was certainly in demand yesterday following Industrial production posting .9% growth vs .3% growth through Feb, while manufacturing production grew 1% versus .3%.
Also in the pounds favour was an upward revision in the NIESR GDP estimate to .9%, its highest level since July 2010. Later today we have trade data with expectation of a narrowing trade balance deficit. EURGBP broke below the .8250 level of support mentioned on Monday but the lack of follow through lower may see a move back higher into a more familiar range. GBPUSD has again fallen short of the 1.6800 level, there have been a number of attempts at a break above here and a break of yesterday’s highs at 1.6754 may see another attempt at the figure. Pound strength still remains firmly anchored to its interest rate expectations.
As we highlighted in our review of the ECB last week the lack of action has seen the single currency regain its footing, particularly against the weaker USD. The ECB talk of action knocked the single currency in the short term but the reality is verbal intervention can only carry so much weight and another month at the very least without intervention still makes Europe and the euro and attractive place to search for yield on investment.
There was talk yesterday that Greece will be looking to return to the debt market as early as this week. Draghi’s comments from last July still resonate and his promise to do “whatever it takes” improves investor confidence. This completely ignores the growth picture and growth outlook for the region. The data calendar has been light and further ECB comments to talk down the currency yesterday were completely ignored by market action.
German trade figures headline the Euro risk, but despite being worse than expected the single currency has moved higher on the day. The ECB’s Coeure speaks in Washington this evening, any further talk on policy action may move the EUR marginally lower but until the ECB act, their words will always be overlooked. EURUSD has been testing strong interbank resistance levels at 1.3800 but has failed to provide a meaningful break higher.
The USD’s performance since Friday has more to do with interest rate expectations than larger risk trends. This has seen a divergence between US and EM rates and hence seen the USD under selling pressure on this front. There has been little US data to shape views so attention today will be on the minutes from March’s FOMC meeting. The meeting produced some noticeably hawkish comments from Janet Yellen and policy makers but markets will be keen to see how much conviction each member has to the current pace of tapering. Should the Fed come across as resolute in their QE cutback agenda, the USD is likely to find a lifeline.