We predicted at the beginning of the week that we were likely to endure a rather dull week in the currency markets. With 80% of the week out of the way, we’re fairly happy in calling that the relative tranquility will continue at least through today’s session.
Yesterday’s PMIs from the Eurozone were strong overall, except in France. The headline composite index – combining both the manufacturing sector and service sector readings – for the entire Eurozone remained at close to 3 year highs. As we said yesterday, we wanted to delve further into the numbers to see just how the inflation picture was shaping up. The preliminary reading of inflation on June 3rd is what most market participants are focusing on; a poor number with a weak core component and the chances of Mario Draghi throwing the kitchen sink at policy and the euro.
In France, divergent price trends were signalled in May. Input price inflation across the French private sector accelerated to a four-month high, according to the survey, with manufacturers indicating a further, albeit slower, reduction in costs while private sector output prices continued to fall by the sharpest amount in 10 months. In Germany it was said that companies passed higher input costs on, mainly as a result of a stronger corporate and private sector. It was said that inflation picked up since April, but still remained modest. It is less than a fortnight until the official number is out and you can foresee euro pressure continuing until then.
GBP has managed to keep close to 16 month highs versus the single currency despite a little disappointment around yesterday’s GDP, current account and public finance data. UK GDP was confirmed at 0.8% in Q1 at the second reading matching estimates, although a sizeable proportion of analysts were looking for an upgrade to 0.9%. Private consumption grew by 0.8% and total business investment rose by 2.7% but exports slipped by 1.0%. Whether the chickens of a very strong sterling are starting to come home to roost or this simply correlates with a poor quarter’s trade amid a weather-affected US and a rapidly stagnating Eurozone is up for debate. It has done the future of the UK’s current account no good in the meantime, only saved this time round by a 1.1% fall in imports.
This morning’s German GDP numbers have shown a country heavily reliant on domestic demand with exports slowing to 0.2% compared to a 2.5% gain in the previous quarter. The increase in construction – +3.6% – can be apportioned to a mild winter, and a 2.2% increase in imports will come as courtesy of a very strong euro but we cannot guarantee how long this will last. Recent factory and industrial output numbers have disappointed. The Bundesbank predicts the German economy will grow 1.7% this year and 2% in 2015. The ECB forecasts growth for the euro area of 1.2% and 1.5% respectively. The divergence continues…
Today’s IFO release, a survey of German business executives, is expected to show a further deterioration in sentiment towards the German economy. Fears over the Ukrainian situation seem to have calmed in recent weeks – when was the last time it headlined the news? – and so we think that any weakness seen will be an expression of fear surrounding the European Central Bank’s movements in a fortnight.
The number is due at 09.00 BST.
The European Elections are underway with voting taking place in the UK and Netherlands yesterday and the remainder of the EU through the weekend. Results are due on Sunday night but UK local elections are showing strong gains for UKIP and Labour at the expense of the ruling coalition Conservatives and Lib Dems.
