A surge in risk appetite greeted the London morning with GBP, EUR, AUD and NZD all surging against the USD early on. The gains for AUD and NZD can be associated with an increase in the price of oil but it was cable that again stole the show. In a repeat of the trading pattern seen in recent sessions, cable pushed ahead aggressively higher early on. Today's move, however, was more significant insofar as it lifted the pound out of its recent range high at USD1.6700. While it is possible that recent cable buying could be linked with month end activity, technically the break increases risk for more gains for cable. However, the pound has not been able to sustain its upward momentum this morning on the back of poor UK GDP data.
Final UK Q1 GDP was revised lower to -2.4% from a previous estimate of -1.9% q/q. The -4.9% y/y fall is the largest fall on record. The current account in Q1 was recorded at a worse than expected -8.5bln. While the better than expected 0.9% m/m rise recorded by the Jun Nationwide house price index had brought earlier support to sterling, the impact of the Q1 GDP report will be to offset optimism over the prospect of UK economic growth at the end of this year. Cable needs to hold above 1.6550/6600 to retain its bullish tone. Elsewhere economic data was also gloomy. Eurozone June CPI fell to -0.1% y/y, a number which should ensure the focus of ECB policy remains on liquidity provision. German unemployment rose by a less than expected 31K in May. However, insofar as the government subsidises employers to maintain jobs, these data do not give an accurate picture of the stresses in the German economy.
Japanese unemployment hit a 5 year high at 5.2% in May consistent with the ongoing pain felt in that economy. The strength of the JPY vs the USD and EUR this morning is not coincide with today's rally in risk and while position adjustment ahead of tomorrow's Tankan report may provide some explanation, month-end activity is also likely linked with the move.
This morning's poor data and the turn lower in stocks in Europe this morning suggests a decline in risk appetite at the start of US trading. This afternoon, US house price data, Chicago PMI and consumer confidence data are due.
