Most majors were confined to established ranges during the European session yesterday after the initial gyrations in the wake of the Japanese GDP data. The euro was perhaps the only standout to this, comments from ECB President Draghi later in the day throwing some further crumbs of hope to the market that the ECB could yet start buying government bonds if the deflation threat persists. Concerns regarding the global economy are clearly to the fore in the wake of the G20 meeting, not least because central banks are, to varying degrees, lacking in terms of the firepower to deal with further slippage in their respective economies. As we mentioned yesterday, this makes for a less trended FX environment vs. what was seen in the previous quarter as the anticipated divergences look less likely to pan out in the way that was anticipated a few months ago.
One of those expected divergences that has come back into line has been sterling. The push above 1.70 earlier this year was in part powered by an expected rate increase before the year end, which has failed to materialise. Indeed, it’s now more likely than not that the BoE will be having to explain an undershoot of the inflation target range (1% to 3%). The headline rate is seen holding steady at 1.2% tomorrow, although it’s notable that expectations from banks and other forecasts are more skewed towards the upside. This could give some scope for sterling to reverse some of the recent weakness, but the market does not appear to be willing to push against the tone of the Inflation Report seen last week. After UK inflation data at 09:30 GMT, German ZEW data at 10:00 will be in focus, with US PPI thereafter at 13:30 GMT. Elsewhere, markets getting increasingly more edgy regarding EURCHF as it continues to move lower towards the SNB’s 1.20 floor.