What FX markets strive for is divergence on the policy path of the underlying currencies. There was the thought that this was coming earlier this year, with the Fed tapering, the ECB potentially easing and the UK keeping rates low via forward guidance. In a near zero rate world, combined with unconventional monetary policy measures, the impact of this is often not dramatic and as expected, which is one reason why the dollar has not behaved as expected and FX volatility has declined. There are fresh signs that things are changing though, which yesterday could be seen on EURGBP. The minutes to the latest MPC meeting in the UK suggested that the Bank of England is getting closer to seeing at least one member of the committee voting for higher rates. This pushed the cross below the 0.8100 level, not seen since November of last year. There was also more talk of exit strategy in the Fed minutes last night, although there were also concerns regarding the housing market and the dollar was little changed. We wrote yesterday about the need for central banks to start preparing markets for higher rates at some point (see “Killing forward guidance”).
For today, we are seeing some mixed messages around. PMI data in China (HSBC measure) was better than expected, which offered some interim support for the Aussie. Preliminary data in Eurozone has seen France weaker than expected (both manufacturing and services below the 50.0 level), whilst data for Germany showed a more mixed message, with manufacturing weaker at 52.9 and services 56.4 (expected 54.5). The euro has recovered from the early lows, but the focus remains on the ECB meeting next month, where the scope for some more stimulatory measures remains strong. More UK data seen today (more details on Q1 GDP), with US claims and home sales data later on.