Euro the focus as doldrum trading continues

• Eurozone PMIs keep EURUSD close to 1.40 before Draghi 

• RBNZ hike rates by 25bps as expected but curve may slip

• Bank of England minutes do little to alter rate expectation landscape 

• German IFO and Initial Jobless Claims due through the session

Once again, we open up here in Europe with the main G10 pairs very much in a holding pattern. Tomorrow I may bring a pillow into the office. It’s obvious what each individual currency is waiting on; euro watchers are looking for the advance reading of Eurozone CPI for April due next Wednesday for further signs of deflation, USD bulls are looking for a strong payrolls announcement on May 2nd. Those looking for a collapse in yen are waiting on any April data that shows tax rises have hammered the consumer sector and sterling bulls will be looking to see if Q1 GDP can beat the 0.7% of the previous few quarters. None of that happens this week and, as such, the doldrums are here.

Advance readings of services and manufacturing sector PMIs from France and Germany were mixed yesterday with a reversion to trend very much in effect; France bad, Germany good. Services and manufacturing growth in France slowed to 50.3 and 50.9 respectively, missing expectations while Germany’s measures rose to 54.2 and 55.0. The overall European measure was 53.3; a 35 month high, pushing the single currency higher on the day.

Mario Draghi, the ECB Chair, speaks later this morning in Amsterdam and the onus once again will be on him to talk down the single currency. Yesterday’s PMI releases have kept EURUSD closer to 1.40 than the ECB would have wanted, and should the Easter effects on inflation work on inflation – has the ECB believes – a higher print, then a move to 1.40 could be on the cards in the coming week.

In other central bank news the minutes of this month’s Bank of England meeting did little to alter thoughts on policy. The MPC has cause to be cautiously upbeat on the UK recovery and are increasingly bullish on growth prospects through the first half of 2014, saying that Q1 and Q2 growth in the UK could be as high as 1.0%.

In the eyes of the MPC, the recent increase in employment has not done a great deal in lessening the amount of “slack” in the UK economy but that a sustainable rise in real wages will help this situation. Likewise, the MPC was said to have a “range of opinions” on the path for inflation over the medium term – a very macroeconomic way of saying “your guess is as good as mine, old chap”.

There is nothing in this release to alter rate expectations in my view and we expect that policy will remain at these record lows for another 12 months.

The big mover overnight has been the New Zealand dollar following another rate increase by the RBNZ. “It is necessary to raise interest rates toward a level at which they are no longer adding to demand,” Governor Graeme Wheeler said following the decision to raise rates to 3.0%. Further rate rises “will depend on economic data and our continuing assessment of emerging inflationary pressure, including the extent to which the high exchange rate leads to lower inflationary pressure”. Last week’s inflation number disappointed and we do suspect, despite being NZD bulls, that the planned 125bps of increases in rates this year may be a bit rich.

The US recovery story was dealt a blow yesterday following a 14.5% fall in new home sales compared to a month ago. Higher borrowing costs combined with price increases have slowed the rate of new home sales while supply constraints have increased following a labour shortage. The dollar was largely unaffected but it does damage the narrative of a housing market fuelled recovery.

German IFO at 9am could surprise higher than estimates given the strength of yesterday’s PMI readings. Initial jobless claims in the US have been very encouraging in the past few weeks with the continuing claims component the lowest since before the global financial crisis. That being said, no great moves are expected.

Have a great day.