GBP/EUR 1.1790 (0.8504)
The USD rally continued in the European session yesterday before giving up its early gains during the US session. EURUSD reached our target of 1.3000 ending its fall from 1.3400 as the single currency faced selling pressure in the face of USD strength following last week’s FOMC meeting. During US trading hours the greenback faced some of its own selling pressure as annualised US GDP figures for Q1 indicated the economy only grew 1.8% versus 2.4% expected.
We would have expected such a big miss on GDP to cause a big reversal in USD fortunes, however the impact was relatively muted and nowhere near the knee jerk reactions we have seen around other releases such as Non Farm Payrolls. If next week’s jobs figures missed to the same degree there would be a far larger sell off in the USD. The data obviously shows some lag as we are approaching the end of Q2 and as such recent data indicating a stronger US economy is likely to have taken precedence in the markets view.
ECB president Mario Draghi spoke in Paris yesterday but said very little new. We have been warning of signs of Eurozone weakness for several weeks now with stirrings in Greece, Slovenia , Cyprus struggling to meet austerity measures and now some pressure on Italian bond yields. We feel there is still plenty of risks to the Eurozone and ECB members have noticeably picked up their rhetoric that the ECB stands ready to act should conditions deteriorate and warrant intervention. Sellers of EUR are urged to hedge accordingly.
In the UK yesterday we had Chancellor Osborne announcing government spending and a plan to cut a further £11.5 billion from spending after April 2015. As expected the BOE financial stability report focused on UK banks and once again highlighted their vulnerability. The pound slipped in early trading as MPC member Miles spoke out supporting further asset purchases. Miles has been one of the 3 voters in favour of additional purchases as he does not believe the UK is growing fast enough. Carney will have his hands full tackling this issue.
We have a busy day today on the data front with plenty of action from both the Eurozone and US economic calendars. EU leaders meet in Brussels for another of their favoured summits, we’ll be watching all day for comments coming from that. German unemployment data has once again supported the recent strong trends coming from the core, the unemployment rate for June fell to 6.8% from expected 6.9%. Consumer confidence is due up later in the morning.
The final revision of Q1 GDP data is also due from the UK, this is the third revision and we’d expect no change from previous indications showing growth of .3% in Q1, .6% year on year. In the US session we have weekly jobless claims and consumption data, consumption will be closely watched following its negative impact on Q1 GDP for the US. Income, spending and homes sales data are all also on the docket.