One of the most notable events in yesterday’s trade came from the eventual breakdown of EURGBP, for almost two months we’ve been pointing to the .8470/50 area as key for EURGBP support and a breakthrough would open up downside towards post Brexit low area (from .8280 to .8320). We finally got that break through yesterday and a technical break of the 200 day moving average started a run lower that saw EURGBP 1% lower in 18 hours, as low as .8403 this morning. It was another day for record highs in US stocks as the opening bell saw a surge in risk appetite in the US session, the day was already trading firmly as European bourses posted some of their highest levels in over a year, this morning the DAX printed fresh 12 month highs on the open while yesterday the STOXX 600 was up .6% and at 14 month highs.
US markets closed off their highest levels but there still seems little sign of appetite slowing down, despite the prospect of raising rates and we’d expected to see a Hawkish tone to tonight’s release of the Feb 1st FOMC minutes. The Euro found itself under pressure, not only against a stronger GBP but also a stronger USD, the single currency feeling weight across the board on political concerns and Greek debt talks. Overnight trade was slightly more choppy with JPY slightly firmer.
There is plenty of activity for GBP again today and the pound continues to hold firm against the USD, while pressing the euro lower. We got very little from the BOE members commenting in parliament yesterday, the general stance appeared to be “rates can go higher, rates can go lower – it depends on what the data shows”. This on the fence positioning is likely to see the BOE licking their wounds. They took considerable slack from almost all angles that their doom and gloom scenarios for Brexit, they were accused of jumping the gun by cutting rates and increasing QE post Brexit – but given the economy has held up thus far and we’ve yet to experience any real shocks in the UK, they can certainly claim they softened the blow. Their current stance however is obvious, they do not want to commit either way, should Article 50 create instability they need to remain positioned to accommodate, and yet as inflation soars they must remain conscious that they may need to raise rates to tackle. UK GDP was weaker than expected this morning at 2% vs 2.2% but the 4th quarter was marginally higher than initially expected. GBPUSD range continues to be 1.2400 area support where break have failed to hold below, and 1.2500 area where sellers quickly emerge. EURGBP has bounced off .8400, .8460 provides first level of resistance. GBP remains vulnerable the Brexit fallout and week data and weaker GBP may be the catalyst the break the 1.2400 downside.
CPI inflation data from the Eurozone and the FOMC minutes are the next big releases of the day to watch, USD has a bullish day yesterday however the market seems less convinced there will be hikes in March and there is still upside potential for USD should the Fed continue with the strong rhetoric. Almost every member across the wires this week has pressed the value of three rates hikes this year, the big question will be, should markets still remain unconvinced, will the Fed risk a shock with a hike unpriced. This will have knock on impacts to stock (which many will argue are due a pull back), while the USD will almost certainly become the most dominant G7 currency.