GBP/EUR 1.2711 (0.7867)
The USD continued to be under selling pressure for much of the trading day yesterday, however the release of the FOMC minutes started a dollar rally that has continued through the overnight Asian session. The Fed ended their QE3 program as expected, what surprised the market was the relatively upbeat assessment of the economy, a more positive rhetoric was the key driver of increased USD demand as markets once again realigned their interest rate hike expectations for the US. In Europe stocks were little changed with the CAC and DAX closing marginally higher while the FTSE rallied .8%. The initial reaction to the FOMC statement saw US stocks facing selling pressure although they managed to pare most of their losses to finish the day close to flat. Stocks and the USD were well supported in trade overnight with Asian equities closing higher while the USD gained ground against 14 of its 16 major counterparts. NZD was one of the weaker performers overnight, already under pressure from the USD rally the kiwi faced further selling following the RBNZ’s decision to keep rates on hold at 3.5%, while a dovish statement and concerns of NZD strength will likely continue to weigh on the NZD.
The market had heavily positioned itself for a more subdued FOMC meeting, while the Fed were expected to announce the end of QE, markets were surprised by the more upbeat assessment of the economy, especially given data continues to point to a mixed pace recovery. There were two key changes in the FOMC statement which have driven USD strength, while the statement did maintain the “considerable time” frame before rate hikes they did highlight that it would be data dependent. The big changes were on the FOMC’s view on inflation and employment, where they saw the likelihood of inflation persistently remaining below their 2% target as diminishing, while they also saw “underutilisation of labour resources gradually diminishing”. This was certainly a more positive tone from the FOMC, especially considering recent concerns on external impacts on the US economy. The pressure will now be on the US economy to continue to perform without the impact of QE, as we regularly point out US data remains mixed and continues to point to a mixed pace recovery. That being said growth is expected to be confirmed at 3% annualised today as Q3 GDP crosses the wires.
There was little data yesterday to impact EUR pairs but the big rally in USD has pushed EURUSD back below 1.2600 with a test back towards 1.2500 support now more than likely. There are a number of data prints from Europe this morning, German unemployment data was better than expected with a decline of 22k vs expected 4k rise, the unemployment rate remaining at 6.7%. later in the day we have German CPI due for release with the benchmark inflation reading expected to show inflation fell .1% through October, although the year on year figure is expected to rise to .9% from .8% and a four year low. The ECB are still only just implementing their range of easing measures so it is unlikely either of these releases from Germany is likely to have any lasting impact on the EUR, we expect further EUR weakness as the ECB ramps up their asset purchases and that view is unlikely to change unless the ECB massively under deliver. EURGBP is currently testing back towards recent range lows below .7900, we did see a test back towards last week’s lows at .7862 and EUR pressures remain to the downside.
Despite outperforming the Euro, GBP has been having a hard time against USD. In fact the pound was one of the bigger losers against the greenback rally yesterday despite both economies running on a very similar path. The BOE have been very quiet of late in relation to rate hikes and low inflation concerns continue to weight on rate hike expectations. Data remains light for GBP through the next 24 hours and as such the pound remain vulnerable to USD strength, support stands at October lows around 1.5880 for now.