Recent news and economic data have hurt the euro and British pound, and both currencies are now trading close to yearly lows against the US dollar ahead of Wednesday’s FOMC meeting minutes.
News that Greece received approval for its next tranche of financing helped risk appetite at the start of today’s European trading session, lifting high-beta currencies to their highest levels of the day. However, the rally ran out of gas after UK economic data badly missed its mark, sending GBPUSD below the 1.4900 figure and dragging the euro (EUR) and Australian dollar (AUD) lower as well.
Greece secured an additional EUR6.8 billion in funding from the European Commission, European Central Bank (ECB), and International Monetary Fund (IMF), but the money came with preconditions after the Troika noted that the reform program was moving too slowly. Greece will now have to pass legislation to comply with the terms of the financing, and whether it can do that remains very much an open question.
Nevertheless, the market took the news as a sign of relief and lifted the EURUSD to within a few pips of the 1.2900 level before selling off slightly.
One sign of the relative complacency surrounding the euro is the recent rally in EURCHF. After making time for several weeks near the 1.2300 level, the pair has now broken out to the upside, trading above 1.2450 in today's session.
The relatively buoyant performance of EURCHF is a clear indication that, for now, the currency market is not overly concerned about any sovereign debt flare-ups in the region. Although EURUSD remains near the lows of the year, its decline is driven largely by US dollar (USD) strength, rather than risk aversion, as was the case in 2010.
See also: The Critical EUR/USD Factor to Watch
Surprise Data Disappointment Sinks the Pound
In the UK, however, the British pound (GBP) was pummeled by surprisingly weak economic data, as UK industrial production printed at 0.0% versus 0.3% expected, while manufacturing production contracted by -0.8% versus 0.3% forecast. The news was particularly puzzling given the steady improvement in UK PMI manufacturing data and suggests that the recovery in the sector remains slow.
GBPUSD tumbled through the 1.4900 barrier and remained there for the rest of this morning’s London session as sentiment towards the pair remained grim. Sterling is now once again within striking distance of the yearly lows near the 1.4800 level, and if North American flows continue to push the unit lower, it could see a test of that level as the day progresses.
Cable is also being hurt by the action in the pound crosses, as EURGBP was able to fill the long-standing gap at the .8600 level and has now broken out through .8650 with longs targeting .8700 in the days ahead.
This Week’s Key Dollar Event
With no US data on the economic calendar today, flows are likely to be driven by equity price action and any possible rhetoric from monetary officials.
The dollar rally has seen a small correction that may continue as the day unfolds, but the longer-term trends still favor dollar gains, especially if Wednesday's Federal Open Market Committee (FOMC) meeting notes reveal a more hawkish bias from the Fed.
By Boris Schlossberg of BK Asset Management