GBP/EUR 1.2033 (0.8310)
Yesterday was mixed on the risk front with European equities rallying higher for the second consecutive day, but in the US stocks struggled to advance despite a strong headline durable good reading and finished the day in the red. The USD struggled and finished the day slightly lower against a basket of major currencies. The tone remained uncertain overnight with Asian markets ebbing between gains and losses with the NZD and AUD outperforming on the currency front while the Eur has continued to look vulnerable.
The ECB’s recent concerted effort to talk down the EUR is having the desired effect. The move has been difficult to miss and the ECB have been masters of verbal intervention since Draghi took over, however there has been a lack of follow through in EUR selling and it may be the case that this time the ECB will actually have to act on their threats.
Draghi and other ECB members have been vocal linking the weak inflation environment with an overly strong single currency but in a global environment where yields remain so low, much of Europe and its debt still offers attractive yields for investors. This is evident in record or multi year lows from Spanish, Italian and Greek yields. Continued negative rhetoric on the EUR will eventually have the desired effect, or the ECB will be forced to act, but for now the single currency is hanging on by its fingernails.
GBP has had a firm couple of days, advancing against the USD and EUR for three consecutive days, since the marginally stronger core inflation. That being said the move has been slow and steady but lacks real drive or conviction to suggest the pound will be going back to recent multi year highs. The pound’s strength continues to be derived from rate hike expectations and the longer the BOE imply spare capacity remains in the economy the further rate hike expectations will be pushed back, should this occur we’d expected GBP bears to begin selling.
February retail sales from the UK headline the European economic calendar with the year on year figure expected to show a 2.9% rise, the slowest pace in 3 months, down from 4.8% in January, this may lead to some reactionary GBP selling but is unlikely to have much effect on real market interest rates.
The USD has had a mixed few days, while struggling to advance further on last week’s gains we have seen some retracement but overall the USD has been relatively neutral over the last three days. Despite the selloff in US equities yesterday the greenback benefited little. US Durable Goods beat expectation posting growth of 2.2% vs .8% expected which should have seen the USD rally but the underlying data was less positive.
The afternoon session brings us US Q4 GDP figures, this will be the third update on the figures and expectations would suggest the market is looking for an upgrade to 2.7% from 2.4% annualised. We also have consumption and jobless claims data on tap, all have the ability to drive taper expectations but the GDP figure will be the primary focus. The USD is firmer so far this morning.