Dollar Supported by German Sentiment and U.K Prices

Traders cannot be disappointed with the markets price action. It’s whippy; it’s unpredictable and most importantly, its providing market opportunity. It’s no surprise that Greece is at the heart of most of the asset price moves – plummeting equities, lower sovereign bond yields or higher safe haven currency prices. However, market positioning ahead of tomorrow’s FOMC rate announcement and ‘dot’ plot projections, coupled with a few Euro economic releases this morning has managed to convince a percentage of the market to pare back on some of their open positions, at least until the investor gets a better handle on the next momentum trend. Most traders do not want to be caught ‘diddling in the middle’ of a tight range. It can become expensive.

What went up comes straight back down

Early Euro data has taken its toll on both the EUR and GBP this morning, with the single unit managing to print a fresh day low after the German June ZEW economic expectations survey disappoints. The pound has managed to revers course from a fresh three-week high to print an intraday low after the U.K’s CPI sub inflation indicators disappointed.

The EUR’s up move this morning lost momentum as soon as easily reachable stops were filled above the psychological €1.1300 handle ahead of the European Court of Justice (ECJ) ruling on ECB OMT bond buying scheme. The ruling was in accordance with its January opinion that bond buying plan was in line with EU law, and within the ECB’s monetary policy mandate. This week in particular, traders have been trading the inverse correlation between the DAX and the single unit. With German stocks off its intraday lows also helped to cap the EUR’s rise higher.

With lots of guessing and little market certainty is always going to lead to whippy price moves, and hence why investors tend to gravitate towards economic releases like this morning’s ZEW expectations survey data for substance and support. However, with no credible sign of progress in Greece is expected to trump risk appetite no matter the economic headline for the time being.

Germany’s June ZEW current situation survey falls for the second straight month, plummeting to a seven-month low that could suggest that Europe’s largest economy may be losing momentum. However, it’s important to remember that the indicator is just a snapshot and not necessarily the beginning of a trend. The June headline print came in at 31.5 versus 37.0 expected, and well below May’s release of 41.9. Current conditions came in slightly above forecast (62.9 vs. 62.6), but below May’s (65.7). To date, the fundamentals of the German economy point to acceleration and not a slowdown in Q2, however, everything will become obsolete in investors eyes if and when the Greek crisis could escalate.

The lack of upward momentum for the single currency leaves last Friday’s EUR low (€1.1151) rather vulnerable. So far, the EUR bulls have been successful in defending the support levels (€1.1225 and €1.1200), pushing the single unit to take out the weak short position stop losses above €1.1300. Nonetheless, current momentum does not seem to favor that move as the market moves stateside. Obviously, a loss of key support would alter the EUR picture rather quickly, and backing for the EUR bear to revisit the €1.10 handle in the short-term.

Pound Plummets on Inflation Details

Sterling has nudged lower (£1.5580) on this morning’s inflation numbers. Despite the CPI year-over-year reading managing to move back into positive territory, it was the ‘other’ components of the data that were softer than expected and has lead to a deflated pound (GBP fell from £1.5610 to test below £1.5567 immediately afterwards).

Rising U.K consumer prices for May brings to an end the BoE’s brief flirtation with deflation. Prices fell -0.1% in April (y/y) but have managed to rally +0.1% (y/y) last month. The return of inflation will reassure Governor Carney and company that falling prices were just a blip and not a deflationary threat.

With core-CPI below expectations (+0.9% vs. +1.0% y/y) will be a blow for any hawk advocating a pre-year end U.K rate hike. With the BoE expecting annual inflation to accelerate to its +2% target by 2017 – on the back of higher energy prices – has the majority of fixed income traders pricing in the BoE’s first rate hike by mid-2016.

Short-term sterling direction will be defined by the USD and what transpires at tomorrow’s FOMC meeting. Despite risk adverse position taking, the pound has been outperforming the single unit on the cross (€0.7222) and has been well supported outright on dips for now (£1.5540, £1.5520).

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