EU summit provides enough hope for a positive open

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Better than expected jobs data from the United States overpowered displeasure at the Federal Reserve Chairman’s unwillingness to talk up further stimulus for the US economy, moving equity markets higher yesterday while their currency counterparts remained quiet. It has been data from the US jobs market that has been the most encouraging in recent months and this trend of improvement has continued with initial jobless claims falling to a new 3.5 year low and expectations are that next week’s non-farm payrolls will be a blockbuster.

The European leaders’ summit yesterday was notable in that we actually received some constructive news from it. International pressure to bolster the EU’s defences against the debt crisis has been increasing for months now and it seems that European leaders are finally listening. It seems that the European Stability Mechanism will have 2 tranches of inward payments from EU governments this year and be complete in 2015, a year before schedule. This follows a U-turn by Angela Merkel and the German contingent who wanted a longer timeline. The pressure from the IMF and the investment community obviously became too much.

The euro has remained offered over the Asian session with EURUSD now below 1.33 and GBPEUR remains within spitting distance of 1.20.

German retail sales were published this morning and declined unexpectedly as price rises hurt the consumer. The increase in the cost of oil and its derived products will not have helped and this seems to have been the factor that has won out. A gain had been expected on the belief that the news from the Eurozone debt crisis was becoming more positive. Yesterday’s manufacturing PMI from Germany maintained the slight positivity of last month but nothing more. The UK measure was also positive at 51.2 but below the 52.0 level that analysts had expected.

We have to remember that manufacturing was the sector that really hurt UK output in Q4, contributing -0.8% to GDP in that quarter, but signs of a bounce back are being seen. Recent data from the sector has been positive with the latest survey from the CBI showing that total orders rose to the highest since August and the export component hit the strongest level in the survey’s 35 year history. The Bank of England will be hoping that this manufacturing renaissance continues as its monetary policy of weakening the pound is tuned to providing fertile conditions for exporters.

The decision that insurance on Greek debt will not be triggered by the upcoming debt swap has also had a negative effect on risk. Despite the ECB’s decision to not take losses on its Greek debt holdings, and therefore the subordination of other bondholders and the insertion of the Collective Action Clauses forcing losses on investors, the ISDA have decided that a default has not occurred and therefore the protection afforded by CDS markets is not viable. We think this decision will change in coming months but could result in a sell-off of peripheral debt in the meantime as investors dump seemingly unhedgeable assets.

UK construction PMI is the main news today for sterling markets and is expected to remain above the 50.0 level and subsequently continue the trend of expansion that has been going since December 2010.

Indicative Rates Sell Buy
GBPEUR 1.1987 1.2014
GBPUSD 1.5916 1.5940
EURUSD 1.3259 1.3281
GBPJPY 129.90 130.07
GBPAUD 1.4778 1.4805
GBPNZD 1.9070 1.9098
GBPCAD 1.5713 1.5722
NZDUSD 0.8337 0.8357
GBPZAR 11.90 11.95
USDZAR 7.4716 7.5016
GBPPLN 4.9195 4.9481
EURJPY 108.14 108.39

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