London Session
Published: July 31, 2009 6:09 AM
Risk appetite has failed to sustain upward momentum in European hours, stocks have pushed lower on jitters about the economic outlook ahead of the release of the US Q2 GDP data this afternoon. Overnight in Asia, rallying stock market has lent support to 'risk' currencies. EUR/USD hit a high of 1.4144 at the London open and has since sunk back to around 1.4100. Similarly, the AUD, the NZD and the CAD have given back some of their gains. Sterling is clinging on to its gains vs the EUR made on news that UK consumer confidence is held at -25, the best level since April 2008.
Today's UK confidence data adds to the optimism sparked by yesterday's Nationwide survey which suggested that UK house prices have now risen for three consecutive months. The UK consumer confidence data, however, was weaker than expected. Nevertheless, signs of stabilisation in confidence and the housing market have promoted the view that the BoE may not increase the size of its current QE plan at next week's policy meeting. Yesterday the Bank announced that it has completed buying all the gilts in the GBP 125 bln program announced to date. In reply to concerns that companies are still suffering from a lack of availability of credit, yesterday the Bank also announced that it will start buying short-term corporate debt. This hints that the focus of the asset purchasing plan is switching and strengthens the view that perhaps the BoE will not be purchasing more gilts. An extension of the GBP125 bln program next week would be sterling negative.
Today's price action in EUR/USD proves that stock markets remain a primary driver. However, noticeable is that EUR/USD failed to break above 1.4300 this week despite the continued upward direction in equity indices. The EUR's inability to climb into a new trading range was supported by yesterday's comments from the IMF which put the EUR overvalued by 0-15% this spring; this is in contrast with its previous leaning which focused on USD overvaluation. The failure of EUR/USD to break higher will feed talk that the USD may draw support this year from an earlier return to growth relative to the Eurozone. Today's US GDP data will be key in determining whether the US economy is in a position to post a positive GDP number in Q4. Note, however, that the GDP series announced today will have been subjected to a comprehensive revision which may alter previous quarters' data.
Sweden announced better than expected Q2 GDP data today (flat q/q) boosting the SEK. The NOK sold off vs the EUR as joblessness reached 3 year highs at 3.1%. However, this number was better than expected. Norwegian employment may already be seeing support from fiscal packages. In view of Norway's 'sticky' CPI data, the Norges Bank could be the first central bank in Europe to hike rates this cycle. EUR/NOK found sellers below 8.7650.
In addition to US Q2 GDP, Canada's May GDP data is also due for release this afternoon. Chicago July PMI will also be released.
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