Euro soars, boosted by inflation and optimism for a deal with Greece
03/Jun/2015 • Currency Updates•
After a run of seven successive sessions down against the Dollar, Sterling rallied yesterday, appreciating by 0.9%, although ending lower against the Euro.
The rally in Sterling was primarily driven by strong data released by the Bank of England in morning trading. Mortgage approvals jumped by the most in over six years, to their highest level in the fourteen months to April, up from 61,945 in March to 68,076. A strong labour market and record low mortgage rates appear to be supporting the market.
Equally as encouraging, growth in the UK construction sector surged to a nine year high last month, following the elimination of election uncertainty by the victory of David Cameron’s Conservative Party. The PMI released from Markit rebounded from April’s 22 month low of 54.2 to 55.9 in May. This was fuelled by construction firms taking on staff at the fastest rate in five months. Elsewhere, the Bank of England’s consumer credit measure decreased, albeit above forecasts, to £1.173 billion in April.
Sterling volatility today looks set to be driven primarily by external and technical factors with Markit’s services PMI the only data release of any note at 9.30am.
The single currency soared on Tuesday, boosted by strong inflation figures and optimism around Greece. As a result, the Euro ended the London trading session 1.8% higher on the Dollar and 1% up versus the Pound.
Following five successive months of negative or static price growth, the Eurozone economy finally returned to inflation in May, with the level of price growth far exceeding expectations. According to Eurostat, prices rose by an annualised 0.3%, providing further evidence that the European Central Bank’s quantitative easing measures introduced in March are already providing the desired results. Even more encouragingly, the core level of inflation, which strips out volatile priced products, rose sharply to 0.9% from 0.6% in April, matching the greatest yearly climb in core prices in over a year.
Yesterday marked what may be the most important turning point in over three months for Greece, with creditors appearing to be close to a bailout offer. Leaders have narrowed their differences over what Athens would need to accomplish in order to access the €7.2bn in emergency aid, with technical experts now left to decide on the text they wish to present to Prime Minister Tsipras. Officials appeared confident that a last minute deal can be struck before Friday’s €300m loan repayment to the IMF on Friday.
The Euro should continue to be well supported today provided there are no negative surprises in the Greece situation or in the release of the European Central Bank’s monetary policy statement this afternoon. The central bank will be announcing its latest inflation and growth forecasts, although they are expected to remain mostly unchanged. As has been commonplace of late, Draghi will likely maintain a low profile and keep the ECB out of the spotlight.
Greenback’s gains over the past week were mostly erased yesterday, with the sharp losses against the Euro causing the US Dollar index to fall by 1.3%.
There was limited data out in the US, with the Dollar’s decline fuelled by a strong Euro. New orders for US factory goods were weak in April, falling by 0.4%, having increased by 2.2% in March. Manufacturing has been hit hard by a strong Dollar and lower crude oil prices. Economic optimism dipped slightly this month according to IBD, falling from 49.7 to 48.1, with a reading below 50 representing pessimism. Elsewhere, ISM’s New York index, a measure of overall business conditions, also fell to 54.0, while the Johnson Redbook index declined by 0.3% for the second consecutive week.
This afternoon will see a string of economic releases in the US. Service sector growth, unemployment change, and the trade balance, are all worth keeping an eye on.