GBP/EUR 1.3816 (0.7238)
The bullish USD outlook that has been prevalent in currency markets since the beginning of the year (and before) has taken a knock. Wednesday’s FOMC statement was along the lines of our expectations but caught the market off guard, downward revisions to growth, inflation and the interest rate horizon all had their effect on USD which sold off rapidly, but yesterday the USD all but covered those Wednesday evening losses, the USD index currently trading at 99.00 vs 99.60 pre FOMC. While the greenbacks environment has shifted somewhat, focus should now be squarely on US economic performance for indications on further USD strength. GBP struggled to find any meaningful strength, in fact nearly every morning this week the pound has woken up to fresh selling. Comments from the BOE’s chief economist suggested the BOE should be ready to act in either direction, the BOE’s minutes would suggest this the next move will be a rate hike but Haldane’s comments, coupled with Carney’s last week would suggest that a strong GBP is not on the BOE’s agenda right now. General risk sentiment was mixed yesterday, European equities traded mixed while in the US the S&P and Dow both traded in the red, with the NASDAQ showing modest gains. Overnight the USD held firm, while the AUD and JPY both lost ground.
Perhaps the biggest surprise in the last 48 hours was not the dovish FOMC or the surge in USD selling that followed, but the subsequent rally in USD from the lows. Given the shift in tone from the FOMC the fact the USD is almost exactly where we were on Wednesday morning is somewhat of a surprise. The simple answer though is that the huge USD selloff, up to 3%, provided good value for many looking to buy USD again. That is not to say the USD bull run will continue, while the FOMC removed their “patience” rhetoric from the policy statement the Fed then made a notable effort to backtrack on suggestions that the removal of patience would open to door to interest rate hikes. Going forward we would expect USD strength to reflect the US economy, any of our regular readers will know we have been suspect of USD strength, going forward if dollar strength is to continue we will need to see a notable uptick in US economic data. There is no arguing labour market conditions have been consistent, with unemployment at the lowest level in 7 years and approximately 3 million jobs added to the economy. The problem is the rest of US data has been slowing, housing data continues to be very mixed, consumer confidence, retail sales, manufacturing all have been trending lower. The US may well be one of the best performing of the major economies but it is not out of the woods just yet, and not unexposed to potential shocks. With data in mind we are not expecting much from the US today and as such USD pairs should remain in consolidation.
There’s not much to say about the EUR at present, a fall to parity against the USD is looking unlikely in the near term following the FOMC’s apparent shift in focus. Needless to say should we see a surge in strong US economic data it will come into focus again but for now lows below 1.0500 should hold EURUSD downside. Weaker than expected PPI data from Germany this morning has had little impact this morning and we have seen data points impact EUR pairs only minimally since the ECB printing presses began. Greek tensions continue to simmer, despite an apparent complacency that Greece will not be allowed to leave the Eurozone and some agreement will be reached, we view this complacency as a risk and carries the ability to begin heavy EUR selling should things not progress in the coming month.