Market Drivers For June 10, 2014
Europe and Asia
AUD: NAB Business Confidence 7 vs. 6
AUD: Home Loans 0.0% vs. 0.3%
GBP: MP/IP 0.4% vs. 0.4%
North America
USD: Wholesale Inventories 10:00 AM
Better than expected UK MP/IP data kept cable afloat above 1.6800 today while the euro slid to fresh monthly lows helping to push EUR/GBP to retest yearly lows near the 8060 level. The euro continues to see liquidation, as the reality of the ECB's negative rate policy begins to sink into the currency market.
The pair drifted lower through Asian and early European trade as shorts tried to run stops at the 1.3550 level. With Spanish yields declining below those of benchmark US 10-year rates, the EZ fixed market now offers less and less value to investors, creating outflows from EZ bonds that are starting to take their toll on the euro currency.
Although the initial market reaction to last week's ECB announcement was rather blasé, with the euro actually recovering most of its losses by the end of the day; this week's price action is much more negative, as the euro continues to not only suffer from a declining EZ rate but also from an improvement in US yields. After dipping below 2.50% last week, US benchmark 10 years rates have remained steady above the 2.60% level, keeping the buck well bid.
Several analysts, including Jan Hatzius, are making the case that US growth is starting to accelerate after a lull in Q1 of this year due to seasonal issues. If this forecast proves accurate, then the greenback should benefit further with EUR/USD sinking to 1.3300 and USD/JPY rallying to 105.00 as the summer proceeds.
Meanwhile, in the UK, the MP and IP data were both in line at 0.4%, which was actually viewed as an upward surprise by a market that was anticipating slightly lower readings. Cable popped back above the 1.6800 level on the news and generally remained relatively well bid as the UK economy continues to send out positive signals. Later today, the NIESR UK GDP estimate will be released, which could provide a further boost to sterling.
For now, sterling strength is best expressed through the EUR/GBP cross which continues to benefit from shifting interest rate expectations in Europe. If the markets become convinced that a rate hike from the BoE is likely to come this year rather than in 2015, the downward pressure on the cross will accelerate markedly and the 8000 level will be reached for the first time in two years.
Turning to North American trade, the calendar is once again barren and trading flows are likely to be driven by technical considerations as we approach key levels in the EUR/USD. With the pair having now broken the 1.3600 figure, the attention of the shorts will shift to the much more important 1.3500 level. Although 1.3500 remains key support, it is clear that sentiment towards the euro has shifted markedly over the past 48 hours and the prospect of a further decline in the pair now appears to be exceedingly likely.