GBP/EUR 1.2358 (0.8090)
The risk environment remains supported and sentiment buoyed as liquidity returns to markets with the return of UK and US markets today after bank holidays. Last week ended with US equities closing off the week at record highs as better than expected housing data supported the push higher. Interestingly however, liquidity and volumes remain exceptionally low, with the Vix, an index that measures S&P market volatility, trading around multi year lows. Higher yielding G10 currencies are leading the charge this morning with the JPY one of the largest losers on expectations the BOJ will introduce further supportive measures.
The European data calendar remains light this morning, however traders are on the lookout for any commentary from the ECB Conference on Central Banks, entering its third day in Portugal. The EUR is facing its worst month since January following ECB comments earlier in the month, with markets now expecting some form of support for the region from the central bank. The big question has been what method(s) the ECB will use, therefore the meeting in Portugal to discuss possible methods to tackle the disinflation environment is pivotal for the single currencies outlook.
These new stimulus measures may well be introduced as early as next week’s ECB meeting, the EUR has faced significant declines since the beginning of the month but at this stage the dovish rhetoric surrounding the EUR has failed to push it back below 1.3600 in EURUSD, while EURGBP is still holding last week’s lows above .8080. The EUR remains vulnerable however, and any indication of firmer confirmed fixed policy actions can send the single currency tumbling.
GBPUSD has failed to break the 1.7000 level yet still trades at 5.5 year highs above 1.6800. The BOE inflation report has done little to dampen rate increase expectations as the UK economy appears to continue to go from strength to strength. There is very little data from the UK out his week and this may well leave the pound open to some profit taking against the USD which has a GDP print revision. As we’ve mentioned there is an awful lot of positivity priced into the pound, for now data is just about maintaining this but there has been a couple of warning signs, we are still seeing plenty of GBP sellers taking advantage of these rates, with increases in options hedging on GBP crosses, with hopes the pound can continue to rise.
The US return from their Memorial Day bank holiday with the data spotlight on durable good orders and consumer confidence. The Q1 readings have been terrible and carried a lot of negativity through into Q2 but since April US data has on the whole consistently improved relative to expectations and in our view this opens the door to some upside surprises from the US through Q2. Such economic improvements are likely to support the Feds continued efforts to taper, with focus then turning towards subsequent interest rate hikes.
As it stands US treasury yields have yet to indicate a breakout in the USD but we are also seeing very little all out weakness from USD trading. Durable good are expected to have declined .7% through April, following an upside surprise through March. Consumer confidence data is expected to have risen to 83.0 from 82.3. Manufacturing data is also due from the Richmond and Dallas Feds. There is plenty to maintain USD interest this afternoon.