GBP/EUR 1.2134 (0.8241)
After a mixed start early in the week, the USD has managed to post further gains looking to claw back a fourth day of gains after consistent but light selling for two weeks. The FOMC’s commitment to return to normal policy has helped the greenback but similar to the sell off, the rally lacks any real conviction. This leaves the USD vulnerable to larger risk trends which appear to be its primary driver at this point, lacking any other major catalyst.
Another move lacking real conviction has been the decline in GBP. Following its post quarterly inflation report rally the pound has dropped against all majors as the BOE and its members continue to try an force the issue home that they will not look to raise rates any time soon. Further declines post weak jobs and weaker than expected inflation were limited but GBP bulls remain in control.
We have often pointed out that GBPUSD in particular has been closely linked to gilts yields, the two year yield fits rate hike timelines and is currently working towards a breakout as it gets squeezed between support and resistance. We will be watching this closely to confirm the next move for GBPUSD and wider GBP crosses. Retails sales from the UK may stoke GBP volatility, despite the market seeing a stronger UK economy, January’s services and manufacturing PMIs, jobs and inflation readings have all missed to the downside. Retails sales are due to decline from 6.1% to 5% year on year, anything lower may see a fresh bout of sterling selling.
The Euro was little phased following a bout of weaker PMI data and remained relatively unchanged on the day. Given the weak fundamentals coming from the region this can be classed as a strong performance. The unexpected drop in the February PMI figure (a key growth indicator) for the region and a weaker consumer sentiment report have signalled a pull back from trends that have been generally improving. The rationale for EUR strength remains in the inflow of capital, particularly into peripheral bonds. A Spanish debt auction yesterday in 5, 10 and 30 year paper saw high demand with yields at six year lows.
Aside from UK retail sales the European calendar is light on data. Looking ahead to US trading home sales data and Fed speak are likely to be drivers of risk .Dallas Fed president Fisher, a hawkish member of the FOMC is likely to make some comments on the continued taper or not debate. Either way we need to see data and news flow supporting a continued taper if the USD is to rally through 2014 as we had expected.