Neutral ECB helps halt the euro slide

Morning Comment          

Current mid-market inter-bank spot rates (as at 07:45 GMT) 

Major sterling  

Major US$  

Sterling emigrate  

Other sterling  

Euro crosses 

Data / Events due today 

Fundamental 

The UK service sector remain in expansion territory but fell further than expected meaning growth in services, manufacturing and construction all slowed in April. On a slightly brighter note, the expectations index for services rose to its highest level in just over two years. Sterling was only marginally softer in the immediate aftermath. 

The euro continued to slip, weighed down by slowing producer price inflation and much higher yields paid in Spain’s bond auctions. There was full take up in both Spanish and French bond auctions but higher yields in Spain drew the most attention. No rate cut from the ECB as had been clear but President Draghi kicked off subsequent the press conference with a dovish tone, noting there were downside risks to the economic outlook and that the ECB would closely monitor further developments. However, a cut next month is far from a done deal as he also noted it would take time for the effects of recent LTROs to work through to the real economy. On the whole, the ECB was far more neutral than had been anticipated which has, for now at least, halted the euro slide.  

Further evidence of potential for weak employment data from the States tomorrow came with a7.1% increase in Challenger layoffs although initial jobless claims were better despite a slight upward revision to last week’s figure. No-manufacturing ISM disappointed with a 53.5 print, well below consensus and the weakest since October last year. The employment component fell from 56.7 to 54.2 making it a miserable weak for employment leading indicators. There were a few Fed speakers again yesterday, this time displaying uncharacteristic harmony with Lockhart, Plosser and Williams all discounting QE3. 

Ahead today, the final readings for service sector PMIs from the Eurozone are first up but little or no change seen from earlier flash estimates. Retail sales from the region are seen unchanged from February and are expected to fall from a year earlier for the 11^th month running. The big release of the day however is the US labour report. This week’s leading indicators without a doubt suggest market expectations are likely to be somewhat lower than official consensus. 

Over the weekend, there are elections in France and Greece. Socialist leader Francois Hollande, who is more growth than austerity focused, is expected to win in France while no clear majority is expected in Greece. 

Technical  

£-usd 

After three consecutive days of decline, the sterling pullback stalled yesterday as rising pivotal support, now at 1.6170, contained early afternoon weakness. Momentum studies remain bearish but while the 1.6185/55 zone holds firm, near term bulls will not give up the fight just yet. Only below here suggests a deeper decline towards 1.6115/10, 1.6065/50 or the psychological 1.6000 level. Stringer supports lie at 1.5955/50, 1.5895 and 1.5835. Resistance now at 1.6215, 1.6275 and 1.6300/25. Further out, 1.6425 and 1.6500/65 provide notable resistance. 

£-eur  

The pound ground out another 22-month high yesterday, slightly penetrating the 1.2320 (now 1.2325) bull channel top but ended the almost unchanged. We would be wary of a move back below 1.2275 which could signal a change in sentiment although below 1.2200 and 1.2160 would really be needed to suggest bulls are losing grip which would bring 1.2115, 1.2080 and 1.2050/45 back into focus. Resistance today at 1.2325/45 and 1.2395. Beyond here, 1.2500 and 1.2750 would attract. 

Analysis of further currency pairs, forward contract pricing, and information on limit or stop loss orders is available at any time on request.                                          

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