Sterling stole the limelight in European hours this morning, with cable flirting with the USD1.60 level for the first time in seven months. There was no specific trigger for the move up to this level and the simultaneous move lower in EUR/GBP. However, with the pound still around 30% weaker vs the EUR and 20% softer vs the USD relative to its pre-Northern Rock levels in September 2007, the sense that sterling has over-priced in bad news continues to gain traction.
Relative to sterling, price action in EUR/USD and USD/JPY has been muted this morning. Both USD/JPY and EUR/USD are currently almost unchanged from early London hours.
Gains in equity indices in Asian and European hours are consistent with a sold degree of risk appetite spilling over from yesterday's US session. In recent weeks, the risk trade has resulted in a softer USD which can be linked with an unwinding of long USD positions built up during the height of the financial crisis. It is reasonable to assume that these flows will thin out suggesting that the USD may start to react more directly to US fundamentals.
This week the USD should find support on the solid results of yesterday's 2 yr auction. The result of the Treasury's 5yr auction should provide a key focus this afternoon. The EUR is likely to find incentive over the coming days from the approach of the ECB's June 4th policy meeting. Comment's from the ECB's Noyer this morning that survey data was 'rather encouraging' played into the 'steady policy' camp. However, these comments were followed by the release of soft German lander CPI which highlights the risk that German CPI could stay close to zero for much of the remainder of the year – a scenario which could allow further ECB easing. On balance it seems likely that the ECB will retain a dovish tone which could leave the EUR with a defensive tone over the coming week. This morning's data releases showed French consumer confidence improved a touch in May, Italian consumer confidence was in line with April data and below market estimates.
Aside from the 5 yr auction, US home sales data will provide a focus this afternoon.
