FX: Exhausted Markets – Profit taking
EUR Immune to Weaker German Data and OECD Forecasts
JPY Soars on USD/JPY Unwind, MoF Data on Tap
CAD – No Surprises from BoC, Slight Optimism on Economy
NZD – RBNZ Threatens Intervention
AUD – Shrugs Off Weaker Leading Indicators
Over the past month we have seen some extensive moves in the financial markets. The dollar index rose to its highest level in more than 2 years, the S&P 500 hit a record high and U.S. 10 year Treasuries dropped to its lowest level in over a year. When we have moves as strong as the ones that we have seen in recent weeks, exhaustion will eventually set in and that is what we have seen today. While currencies, equities and bonds all reacted in a way that is consistent with profit taking.
While the British pound held steady against the EUR, it traded higher versus the greenback. Sterling completely ignored the steep decline in the CBI reported sales index and the dovish comments from Bank of England policymaker Bean and extended higher on dollar weakness.
Household and business sentiment data will take centre stage across Europe today. In the UK the Lloyds Bank Commercial Business Barometer for May will be watched for guidance on Q2 GDP growth following the 0.3% q/q pickup in Q1. Last month, the market analyst’s outlook for the UK economy improved, which suggested that the recovery in activity seen in Q1 was set to continue.
The euro traded higher against the U.S. dollar today but the rally stalled below 1.30. Considering the steep slide in European equities and the larger than expected increase in German unemployment, the euro should be trading much lower. However dollar weakness has driven all of the major currencies higher and continued profit taking should lend additional support to the euro. Yet in the grand scheme of things, the rise in German unemployment and the OECD’s grim forecast leaves the ECB in a position to ease and while the bar may be high, they may not be shy about publicizing their options.
Euro area industrial and consumer confidence data for May are also released this morning. After recovering between October 2012 and February this year, industrial optimism has softened a little recently as euro area growth prospects disappointed. However, the index is expected to edge up this month, on the back of the recent cut in the ECB’s key refinancing rate. On the other hand, consumer confidence has recovered steadily since last November, broadly in line with the momentum of euro area equity markets.
US Q1 GDP (saar), pending home sales for April and initial jobless claims are also released today. Lloyds TSB global team expect the GDP figures to be revised upwards in line with a modest softening of imports. The recovery in the US housing market is also expected to be reflected in a 2.0% m/m pick-up in pending sales. Initial jobless claims, released for the week ending May 24 are expected to repeat the previous week’s reading of 340k.