GBP/EUR 1.2200 (0.8197)
The markets dependence or perhaps reliance on loose Fed policy has not been more evident than the last few weeks. US data continues to disappoint and January retails sales yesterday missed to the downside with revisions lower for December and November. Yet this lifted US equities and meant the USD continued to fall as the markets scales back their next taper expectations, its seems like we have fallen back to old ways where bad news lifts equities and hurts the USD. The pound has continued its rally from the BOE inflation report, the BOE’s vagueness on “spare capacity” allowing markets to make up their own mind on rate increases and with an upward revision of GDP from 2.8% to 3.4% the market is assuming a hawkish stance.
Nine consecutive trading days of losses has seen one of the worst USD performances in over a decade. The last time the USD (index) faced this period of continued selling was July 2007 and May 2006 and it has to be said despite facing declines there is conviction lacking. July 07 saw declines of over 170 pips, while May 06 the greenback dropped over 300 pips, this route has seen the index fall just over 120 pips. Bad weather is being blamed for the recent weak data, perhaps this accounts for the hesitation for an all-out dollar sale. January industrial and manufacturing data for the US is due today, as is the Michigan confidence survey for Feb.
GBPUSD managed to set multi year highs once again yesterday and this morning has traded above 1.6700 for the first time since May 2011. There was no main driver behind this fresh break higher and what we are seeing is a continuation of sterling demand from Wednesday’s BOE Quarterly inflation report. We mentioned yesterday that the market has lost faith in BOE guidance and set to their own devises. 1.6750 is the next major level for GBPUSD and with little UK data due today we may see this tested ahead of the weekend.
Positive German GDP figures saw a revision back to .4% GDP for Q4 with an upward revision for France also helping lift the single currency this morning. Further good news from Italy who had quarterly growth for the first time since 2011, albeit at .1%. Despite the ECB continuing to say deflation is not a concern disinflation clearly is as they cut the CPI forecast to 1.1% from 1.5% for 2014. Italy will get their third PM in a year as PM Letta resigned under growing political pressures. All of the above couldn’t sum up the region much better, growth is returning at very subdued levels. Disinflation however is a concern despite what the ECB say publicly and political fragilities remain a tail risk.