GBP/EUR 1.2443 (0.8035)
Equity markets have been trading on low sentiment over the last 24 hours, both European and US shares posted losses through yesterday’s session and this continued overnight with Asian equities closing in the red, with the exception of the Nikkei which posted gains led by declines in JPY (JPY and the Nikkei generally tend to be inversely correlated), which traded to a six year low against the USD. The USD continues to be the “go to” currency at the moment, the reshaping of the fundamental picture in the US through Q2 has bolstered appetite for the USD, especially as QE comes to an end and the picture in the US then turns to raising interest rates. Uncertainty in other regions has fed into USD demand, with over a week to go for the Scottish referendum GBP is likely to remain volatile, the Eurozone faces further easing as loose monetary policy opens the door for the beginning of QE in Europe and as mentioned above weakness in JPY has also seen increased demand for the greenback.
Much of USD strength over the last week has really been on the basis it is the “best of the rest”, last week’s labour market report usually would have seen aggressive selling in USD but the muted reaction highlight that investors have little other options and protecting risk is paramount. Yesterday evening there was a report suggesting the market has been underestimating the Feds timing of a rate hike, very similar to comments the BOE’s Mark Carney made in June, we will be looking for further clarification on Fed policy timing in next week’s FOMC meeting where we expect updated forecasts and a press conference. Data was light through yesterday’s US session and we have little to gather interest again today, the USD is likely to be shaped by what’s going on elsewhere.
There was a host of data from the UK yesterday but it did very little to shape GBP pairs. Industrial production figures were better than expected showing a rise of .5% through July. The NIESR GDP estimate printed .6% through August which fell in line with expectations. Data from the UK continues to point towards a robust economy, and BOE Governor Carney spoke in Liverpool yesterday, needless to say he faced question on interest rates and a monetary union should Scotland vote yes and he was frank on both accounts. Carney offered a direct view on rate hikes saying there would be one by Spring 2015, with the pace of hikes gradual from there. He also said there are no plans for a currency union should Scotland vote yes, GBP crosses traded within a range with GBPUSD testing support at 1.6060 before trading back as high as 1.6150.
Today’s calendar is highlighted by commentary from BOE officials with Governor Carney and Deputy Shafik, as well as MPC members Weale and Miles all facing testimony in front of the parliaments Treasury Select Committee on the quarterly inflation report. Carney’s indication of spring rates hikes can certainly be used as a base case guide but with Weale one of the dissenting voters last month he clearly wants to see rates rise ahead of year end. GBP paused yesterday after 5 straight days of declines, in the midst of 9 weekly declines out of 10, this puts the pound in hugely oversold territory especially against the USD, should BOE members rhetoric be supportive of earlier rates hikes we may well see the pound pull back some lost ground. The referendum remains key however, and any short term rise in GBP fortunes will likely be tempered until the September 18th vote.
The EUR was one of the top performers again through yesterday’s session as a slight correction takes place. It is highly unlikely this represents a change in the fortunes for the single currency and there is no real data supporting a shift in the fundamental picture here, European equities traded lower and yields in Sovereign dept jumped while 3 month Euribor rates declined to a fresh record low at just .1%. Today’s Eurozone calendar is light so again we will be taking leads from broader market risk appetite.