Positive Surprises from the Eurozone

The euro rallies after surprisingly upbeat data while the pound surges and the dollar’s rally runs out of steam ahead of today’s Fed decision.

Previous Day's Market Highlights

The euro rallied on Tuesday, spurred on by better than upside surprises to economic data, to reach its highest levels against the dollar in just over a week. Markets primary focus was preliminary flash 1st quarter GDP numbers, the first official estimate of eurozone economic performance this year. Data showed the euro area growing at 0.4% on a quarter-on-quarter basis, the best quarterly growth since Q2 2018, and at 1.2% on a year-on-year basis, a modest pickup from the final quarter of last year. Drilling down into individual countries, Span’s economy grew at the fastest pace since the final quarter of 2017, while Italy emerged from recession with growth of 0.2% in the 1st quarter. While the data will be revised over the coming months, markets took solace in the relatively upbeat data, perhaps a sign that green shoots are emerging and data has begun to bottom out. Other eurozone data also beat expectations, with the unemployment rate falling to 7.7%, the lowest since September 2008, while German inflation also picked up to 2.1% on a year-on-year basis. On the whole, data painted a surprisingly upbeat picture of the eurozone economy, especially considering the negative sentiment surveys earlier in the week. 

Elsewhere, the dollar’s recent rally largely ran out of steam, with the dollar index falling for a 3rd consecutive day. The dollar’s fall could be put down to a multitude of reasons, chiefly month-end portfolio balancing along with market participants positioning and removing risk ahead of this evening’s Federal Reserve rate decision. The pound took advantage of the dollar’s weakness, with cable (GBP/USD) chalking up its 3rd consecutive daily gain, and best daily performance since 13th April. A break of key technical levels, including the 200-day moving average, a typical boundary between near-term bullish and bearish trends, sent the pound to its highest levels against the dollar since 18th April. The pound traded recorded similar solid gains across the board, reaching its highest levels against the euro since 10th April. 

Other data focuses on Tuesday included February’s GDP figures from Canada, which confirmed the country’s sluggish start to the year, with the economy contracting by 0.1%. Overnight, labour market figures from New Zealand have disappointed, increasing the odds of an RBNZ rate cut next week and stinging the kiwi dollar. Data for the 1st quarter showed the unemployment rate ticking down to 4.2%, as expected, however employment in New Zealand actually decreased at 0.2% on a quarter-on-quarter basis. Further adding to the relatively downbeat picture was a decrease in the participation rate, to 70.4%, along with wage growth missing expectations. Markets now assign a 55% chance of an RBNZ rate cut as soon as their policy meeting next week, with both the data miss and increased rate cut expectations sending the NZD around 0.3% lower. 

Away from FX, equity markets were mixed, with the pan-European Stoxx 600 falling by 0.1% and London’s FTSE 100 losing 0.3%, the latter largely due to the move in sterling. Across the pond, the S&P 500 edged up to a fresh record closing high, adding 0.1% to close out its best 4 month stretch in just under 9 years, having gained 3.9% in April. Finally, oil prices rallied, helping to support the loonie, as political turmoil in Venezuela and Saudi support for OPEC cuts tightened supply. Benchmark Brent increased by a shade under 1%, while US WTI added 0.25%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1620 1.1685 1.1512 1.48%
GBP/USD 1.3035 1.3132 1.2866 2.03%
EUR/USD 1.1220 1.1323 1.1110 1.88%
GBP/AUD 1.8490 1.8610 1.8093 2.78%
GBP/NZD 1.9610 1.9620 1.9242 1.93%
GBP/CAD 1.7450 1.7615 1.7300 1.79%

Today's Market Highlights

The month of May begins with a busy economic calendar, despite eurozone markets being closed in observance of Labour day. Today’s main highlight will be this evening’s conclusion of the Federal Reserve’s 2-day monetary policy meeting, though no change to interest rates is expected, despite President Trump once again urging for a rate cut - this time by 100bps. Although no alterations to policy are expected, markets will be focusing on the Fed’s likely future policy outlook, especially with market pricing having diverged significantly from the Fed’s official forecasts - with Fed Funds Futures currently assigning a 66% chance of a rate cut by year-end. Markets will also pay close attention to the Fed’s views on the economic outlook, after a recent improvement in sentiment, stemming largely from diminished geopolitical risks, in addition to the US economy experiencing a ‘goldilocks’ scenario of benign inflation and solid economic growth. The former point, benign inflation, is likely to be a significant area of focus at Fed Chair Powell’s press conference. 

A couple of tail risks are however present and should be noted, namely the Fed altering their balance sheet run-off or cutting the interest rate on excess reserves (IOER) by 5bps, allowing the Fed to keep control of the Fed Funds Rate and prevent the rate creeping above the top of the target range. It should be noted that the latter is a purely technical change and does not impact monetary policy. On the whole, the Fed are likely to re-emphasise their patient approach in order to support continued economic expansion, though with markets seemingly expecting a relatively dovish tone, even a neutral-sounding policy statement may be interpreted as hawkish, hence upside risks to the dollar and downside risks for equities. 

Elsewhere, the usual monthly set of PMI figures will be eyed as an early barometer of Q2 economic performance. Manufacturing figures are due from Canada, the UK and US, with the latter likely to attract the most attention in light of the recent narrative of US economic outperformance. Figures from ISM are expected to fall slightly to 55.0, though such a level would still represent a strong level of expansion. Meanwhile, the UK’s manufacturing PMI is expected to fall 2 index points to 53.0, with the likely fall stemming from a drop in the pre-Brexit stockpiling which has recently underpinned the index. Finally, from Canada, PMI figures are expected to bounce back from their lowest levels since September 2016, increasing to 51.5. Also of interest this afternoon will be ADP nonfarm employment change figures, though the correlation with Friday’s official payrolls number is dubious at best. Markets expect the data to show the US economy added around 180,000 jobs in April, around 50,000 above the survey’s previous level. 

Finally, the central bank speakers calendar is also relatively busy today. Markets will hear from ECB Vice President de Guindos this morning, before tuning into BoC Governor Poloz and Senior Deputy Governor Wilkins’ 2nd day of parliamentary testimony this afternoon.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Manufacturing PMI (Apr) 53.0 55.1
1:15pm USD ADP Nonfarm Employment Change 180k 129k
2:30pm CAD Manufacturing PMI (Apr) 51.5 50.5
3:00pm USD ISM Manufacturing PMI 55.0 55.3
7:00pm USD Federal Reserve Interest Rate Decision & Policy Statement 2.25% - 2.50% 2.25% - 2.50%
7:00pm USD Fed Chair Powell Press Conference