Euro continues to sit closer to the 1.40 level in EUR/USD than the European Central Bank would have wanted. The single currency moved higher after Obama threatened further sanctions on Russia. The EUR/USD move is obviously a reaction to Russian banks’ efforts to diversify away from the USD, a currency that may not be as easy to get in Russia in a few weeks. The weakness of these additional sanctions – on 17 companies and 7 ‘inner circle’ individuals – allowed Russian assets to recover some of their losses.
The remainder of the euro strength has come from a report in which the ECB President Mario Draghi has told German politicians that a QE programme is not likely at the moment. This would match up with the rhetoric from the European Central Bank in the previous weeks; a bank that believes in a period of low inflation but little risk of outright deflation.
GBP also moved higher yesterday morning as traders began to price in the mega-merger in the pharmaceutical industry. AstraZeneca (AZN.LONDON) may be worth $100bn to Pfizer (NYSE:PFE) but that is a heck of a lot of cable to shift even in a very liquid cross. GBP/USD was unable to stay as well bid as EURUSD given the strong buying of euro by Russian banks in the European session.
Q1′s GDP numbers from the UK are due this morning – albeit the volatile provisional release – and should confirm that the UK’s recovery is continuing at a fair old clip. Manufacturing, construction and services output numbers have all been healthy throughout the quarter despite the softening of PMI measures comparatively from Q4.
All in all, we are expecting growth to increase by 0.8% in Q1 and around 3.2% on a year-on-year basis. It is a matter of time until these strong figures start to see some form of dissent by the more hawkish of Bank of England members, although we maintain the view that the PMI numbers later this week are more useful in gauging the strength of the UK’s corporate sector.
The number is due at 09.30 with the more bullish of estimates at 1.0%, consensus at 0.9% and the low at 0.6%. Elsewhere, the story of falling volatility in currency markets continued with overall volumes falling to a 7 year low. Yesterday’s slip was a continuation of the low-rate trend that we have been seeing for years now, but emphasised by an Interfax report that some Russian troops had returned to base overnight from positions close to the Ukraine border. We have seen AUD and NZD come lower overnight as investors continue to shift price out some fairly aggressive rate rise expectations. Overnight swaps markets have lost 40bps of increases in the past 2 weeks – a sign that the 125bps of increases the RBNZ wanted through the year was a bit too rich.
German CPI will give us a fair sign of where tomorrow’s Eurozone CPI number will be tracking. Once again, consensus estimates put Eurozone CPI at 0.8% through the past month, 0.3% higher than March’s and, although still a fair way away from the ECB’s 2% inflation target, a lot healthier. Anything higher and the market will be looking to take EURUSD to the 1.40 level and GBP/EUR back towards 1.20. The German measure is due at 13.00 with releases from individual states due throughout the morning.
