Despite major currency volatility falling to its lowest level in seven years, there has been some recent movement in the forex market driven by fundamental data releases stretching from Australia to London in the overnight session. The data have renewed intraday interest in some of the major currency pairs, and though market action has been subdued, any movement at this juncture is a positive for a forex market cemented to confined trading ranges.
The 18-member single currency, the nemesis of many a portfolio position, will not go down and has now climbed higher for the time being. For a brief period, the EUR was hemmed in and comfortably trading within arm’s length of €1.3800 due to option-related interest. The market has been waiting for eurozone flash purchasing managers index (PMI) data to either push the EUR out of its current position, or with weaker readings, strengthen the case for the European Central Bank (ECB) to act. To date, flows into European equities and the peripheral debt market have been supporting the EUR; however, many investors still require fundamental assurance and that has come in the form of some flash PMI readings.
Eurozone Business Activity Expands
The eurozone composite flash PMI managed to conjure a 54 print, stronger than the 53.1 that were expected. It’s near a three-year high, but not surprisingly much of the strength continues to be driven by Germany (56.3). The composite for France stands at 50.5 (barely in expansion territory) and even with France lagging, the strength in the composite would suggest that the periphery is not as weak as many had expected. It seems to have returned to being “fragile and uneven.” Some positive prints have managed to push the EUR to session highs (€1.3848) with Scandinavian pension funds having the largest appetite for the currency. Do not be surprised if these elevated levels begin to attract some speculative top picking given that ECB President Mario Draghi speaks tomorrow. The recent dovish dialogue from other ECB talking heads would suggest that the market could expect Draghi to “coo” as well. However, real money buying interest has been noted on shallow dips from the highs (€1.3855). Better U.S. data has led the specs into EUR/USD shorts, and with this morning’s slight improvement in eurozone data, it will begin to put these shorts under some pressure. Assuming nothing geopolitically untoward, the minutes from the latest Federal Open Market Committee and eurozone consumer-price index data, both due on April 30, will be the next critical event for EUR position holders.
The Pound Holds Steady
The pound has been unable to make fresh five-year highs after this morning’s Bank of England (BoE) minutes saw downward pressure on the inflation front. As expected, there was a no-change decision on quantitative easing being left on hold at +0.5% and £375B, respectively. However, the headline that the Monetary Policy Committee (MPC) saw a range of views with regard to the degree of “slack” in the economy has left near-term gilt futures trading higher and GBP trading under pressure (£1.6790). The MPC estimated in forward guidance II that slack equated to 1% to 1.5% of gross domestic product.
BoE officials are also struggling to make sense of the U.K.’s big rise in self-employment and what effect it will have on inflation. BoE Governor Mark Carney and company believe much of the slack is concentrated in the labor market; despite a falling unemployment rate the concept of “underemployed” seems prevalent. U.K. self-employment rose by +200k in the three months to January and accounts for 50% of total employment in the past four years. Carney is trying to understand if this phenomenon is a true change in work practices or a “disguised” form of labor slack in the British economy. The fixed-income traders have been pricing in a rate hike for the BoE early next year. Nonetheless, expect the BoE to kindly remind the market that “the precise timing of and the speed of rate hikes will depend on how quickly ‘spare capacity’ in the U.K. economy is used up.” While corrective moves deeper into the £1.6700’s cannot be ruled out, the scope for many is for new multi-year highs from sterling. Many interested investors remain better buyers of the pound on dips.
EUR Strangled By Options, GBP Awaits BoE 
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