In the European session yesterday we saw some well received earnings reports which helped steady European bourses with the Stoxx 600 eventually closing the day flat. GBP found itself under some pressures once again, the pound initially rallied as it found support following a 5 year high in inflation, the print coming in at 3%. However it was comments from Mark Carney that eventually sent the pound lower as he believed inflation will be top at 3%, while an OECD report painted a bleak picture of the UK economy post Brexit.
In the US stocks edged higher in early trade but gains were minimal, despite the Dow Jones breeching the 23,000 mark. The euro also found itself facing selling, yesterday it was lower across the board in early trade but through the afternoon we saw some slight recovery with EURUSD finding support at 1.1732. The USD found itself bid throughout the day, the USD index now up over 1% from Friday’s printed lows with markets now pricing in Fed chair probabilities into the greenback. The rise of Stanford’s economist John Taylor up the potentials list after his meeting with Trump, provides a more hawkish outlook for US rates and thus a firmer USD.
The euro could well find some strength today as Mario Draghi is due to speak, however the real direction may well be dictated not by what he says but how the market interprets it. The Eurozone’s inflation expectation continues to rise and while the region still remains below the ECB’s 2% target, the ECB feel there is scope to scale back on easing. This has been clear for a while and eyes are on next Thursday’s (26th) meeting for clarity. As it stands markets expect the ECB to scale back their asset purchases to €40bln, what remains to be seen however is how long these purchases will continue, if we are to listen to what the ECB has been saying for several months, where they have emphasised the importance of QE and the ultra-low rate environment. Even yesterday the ECB’s Constancio was speaking and suggested that even should the ECB look to recalibrate their monetary policy, they will still need to maintain a very accommodative stance, and that Europe and other developed economies need to take macro prudential policy much more seriously to avoid another crisis. This has been the general rhetoric from the ECB throughout the year, however market focus has just been on “taper” and should Draghi (or any of his other ECB cohorts due across the wires today) suggest monetary policy is limited, it will provide some lift to the euro. 1.1700/25 area continues to provide support for EURUSD, yesterday lows at 1.1732 just above the high line, this remains the view for today, while initial rallies towards 1.1790 should find light resistance, while rallies higher will run into more sellers around 1.1850/70 area.
The OECD report outlining the outlook for the UK puts it well behind the rest of the G7 in terms of growth prospects. The UK is already trailing its G7 counterparts and as Brexit uncertainty rises, this will likely only increase downside pressures on UK growth. Some headline figures are ok, people will spout labour market stats and highlight the FTSE has rallied over 30% since the vote. But let’s be clear, the UK has not left the EU yet. For most it has been business as usual and yet statistics are in decline. Stripping out the FTSE international business and focusing on the mid-level UK business and we see that the UK has dramatically underperformed almost all developed markets. Unemployment levels are near record lows but again these are misleading. The rise in zero hour contracts which the UK count in their figures has mislead real figures, wage growth is getting squeezed by inflation and in reality more people might be in employment but they are working less hours for less money. Today’s labour market data saw wage growth at 2.2% vs yesterday’s inflation print of 3%. GBPUSD broke down yesterday, with support now at 1.3155/65 area, while any rally higher will find light resistance at 1.3226 and larger sellers as we approach 1.3300. EURGBP holding just below resistance at .8930 while any move lower will run into Euro buyers around .8856, and again .8800 area is where larger buyers will emerge.