GBP/EUR 1.2113 (0.8257)
The shortened Easter week started on a positive note despite the escalating situation in the Ukraine as US and European stocks posted gains following last week’s sell off. The rally in equities didn’t knock the USD which has dislocated itself from risk trends and is now following US treasury yield outlooks. Better than expected retail sales in the US and industrial production in Europe supported the positive risk tone, while the EUR struggled to maintain strength following increased speculation the ECB are moving closer to a QE style easing program.
We have long spoken of a verbal intervention style policy from the ECB and policy makers have certainly been trying their very best to talk down the EUR without having to resort to impacting monetary policy. The 40 pip gap lower in EURUSD from Friday’s close to Monday’s open was the largest weekend drop in over 13 months, yet through the European and US session the single currency managed to hold above 1.3800.
The direct targeting of the exchange rate by Draghi over the weekend certainly shocked some in to selling, but unless the ECB take affirmative steps towards action the allure of Eurozone yields is likely to keep the single currency well supported. The German ZEW economic sentiment survey for April is due this morning, alongside Eurozone trade data.
Today brings us key inflation data for both the US and the UK, with both central banks shifting their policy stances to spare capacity, the focus has moved away from the labour markets in both countries but more on a collective group of factors, one of which is the inflation reading.
A host of price readings from the UK take centre stage this morning. CPI inflation is expected to have grown at .2% during March vs .5% in February with both the Core and headline reading expected to fall to 1.6%, below the BOE’s 2% target level. We have been quick to mention that there is a lot of good news priced into current GBP exchange rates with interest rate hike expectation set for early 2015 in real market rates. The issue here is if inflation continues to decline the scope for increasing rates diminishes. GBPUSD and EURGBP remained poised at key levels ahead of the release. GBPUSD has been rejected from 1.6800 for the third time in as many months, a weaker reading here may bring further pound selling into the market.
Yesterday’s retail sales release in the US saw a pick-up in treasury yields which helped lift the USD with moderate gains through yesterday. In the US, inflation is expected to remain relatively limited at .1% through March and 1.4% year on year, up from 1.1% previously. The weather impact in the US should have filtered its way out and while Q1 may have been somewhat anaemic in terms of growth we expect to see improvements through Q2 to supportive of a stronger USD.