UK
As reported yesterday, UK Construction PMI was released, the slightly better than expected figure still revealed a fall from last month but despite being the lowest figure for 3 months the pound enjoyed early session gains. After 2 days of range bound consolidation, GBPUSD finally gathered steam and pushed decisively above the 1.5400/10 resistance area from a low of 1.5376 to reach a 6-day high of 1.5515 amid improved market sentiment, but retreated to levels sub 1.5500 as the dollar started to gain traction as the US markets opened.
GBPEUR hit a high of 1.2419 but fell sharply in the afternoon dropping to a low of 1.2322. The fall against the euro has continued overnight as GBPEUR hovers just above 1.23. The next support level to watch is 1.2285 to judge the decline.
The recent aggravation of the EU debt crisis might push the Bank of England towards an expansion of its asset purchase program later today. City analysts have said the decision is far from certain but remains a distinct possibility. As far as BoE’s interest rates are concerned any cuts are unlikely but could happen in co-ordinated action with other central banks.
UK Halifax House Prices for May came in this morning at 0.5%m/m and -0.1% y/y versus expectations of -2.4%m/m and -0.5%y/y
PMI Construction data released this morning beat expectations at 53.3 matching last month’s figure.
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WORLDWIDE
The highlight of yesterday was the ECB verdict to keep interest rates on hold at 1.00%, although there was speculation for a 25bp, EURUSD was unmoved on the back of this release suggesting a cut was not priced in.
In his press conference afterwards ECB President Draghi remained objective. He noted that Eurozone growth remains weak and that the economic outlook is subject to downside risks. He also said that market tensions and unemployment will weigh on the Eurozone economy.
President Draghi’s two key comments – that the ECB is watching data closely and is prepared to act, and that a few council members called for a rate cut – suggest that another round of easing or at least some new measures could be introduced if market conditions deteriorate.
After initially falling to 1.2456, EURUSD rose during the press conference to hit a high of 1.2570 as the European markets closed. Overnight the gains continued, briefly touching 1.2583. The pair currently sits at 1.2550 and the 1.2625 is eyed as the next key resistance level.
German Industrial Production fell in April by 0.7%, in comparison with the 1.4% rise registered in March. On a monthly basis German Industrial Production decreased in April by 2.2%, following 2.2% growth in March. This reading is lower than the expected 1% drop.
Germany has remained the region’s strongest economy since the onset of the crisis, recently posting Q1 economic growth of 0.5% which helped the Eurozone avoid recession. Wednesday’s data increased fears that that economic woes will catch up with Germany, which has thus far benefitted from low unemployment and increased exports to emerging markets.
IMF estimates that Spanish banking sector needs at least EUR 40bln in new capita – all eyes will be on the Spanish 10-year bond auction today
Yesterday the Fed published an updated edition of the Beige Book, which is released in conjunction with Fed’s monetary policy meetings. The report showed a slightly more positive image of the US economy. This somewhat optimistic tone suggests a new round of QE seems to be somewhat premature. US QE is a key catalyst for USD weakness so providing Ben Bernanke doesn’t elude to anything in today’s speech, yesterday’s data could support the US currency for the time being
Better growth numbers from Australia, stronger equities and rising commodity prices have all supported the AUD, and the CAD this week as they continue to extend a respective 2.7% and 1.2% move against sterling. Against the US dollar, AUD has moved from 0.9775 to 0.9990.
With the aggressive decline in growth-sensitive markets since the beginning of May, expectations for a stimulus response from the ‘financial stability guard’ (Fed, ECB, PBoC, etc) have risen sharply, however to date this week official comments contradict this rehetoric.
