Forex: Euro and Pound May Rise on Revised 2Q German, UK GDP Data

The Euro and the British Pound may rise if revised second-quarter German and UK GDP figures help reduce the probability of further easing from the ECB and the BOE.

Talking Points

Euro and Pound May Rise on Revised 2Q German, UK GDP Data
Yellen, Kuroda Speeches in Focus at Fed’s Jackson Hole Symposium
Aussie Outperformed as Yen Sank Amid Risk-On Trade Overnight

Second-quarter Gross Domestic Product figures are in focus in European hours. The final revision of German GDP is expected to confirm flash estimates showing a 0.7 percent quarterly increase, the best reading in over a year. Eurozone economic news-flow has steadily improved relative to expectations since late April, suggesting forecasters continue to underestimate the extent of recovery underway in the currency bloc. This opens the door for an upside surprise, which may boost the Euroby way of reducing ECB interest rate cut speculation as prices broadly track the monetary policy outlook (as implied by the spread in front-end bond yields). Similarly, the revised set of UK GDP figures may outperform given impressive results on the macro data front since March, making for more forgiving BOE expectations and bolstering the British Pound. We continue to hold short EURGBP.

Later in the day, the spotlight returns to Federal Reserve policy speculation as the first full day of the Jackson Hole Economic Summit gets underway. While Fed Chairman Ben Bernanke will be absent at this year’s gathering, Vice ChairJanet Yellen will be in attendance. Yellen is one of the leading candidates to replace Bernanke when his tenure ends in January 2014. If she is chosen, it will be up to her to manage the Fed’s move toward monetary policy normalization. With that in mind, traders will be keen to hear what she has to say on the matter of QE “tapering”, with hawkish overtones likely to boost the US Dollar (and vice versa). Comments from Bank of Japan Governor Haruhiko Kuroda may also prove interesting. Kuroda’s aggressive reflation program strikes what is arguably the starkest contrast with the Fed’s policy trajectory and further dovish commentary could carry significant implications for USDJPY as prices test critical resistance.

The Japanese Yen underperformed in overnight trade, sliding as much as 0.4 percent on average against its leading counterparts. The move tracked a rally in Asian stocks, suggesting the swell in risk appetite bolstered demand for carry trades funded cheaply in terms of the perennially low-yielding currency. The MSCI Asia Pacific regional benchmark equity index added 1.4 percent, picking up where US shares left off after yesterday’s strong PMIs from the Eurozone and China helped ease global growth concerns brought on by the looming reduction in Fed stimulus. The Australian Dollar was best able to capitalize on investors’ chipper mood, adding as much as 0.4 percent against the majors.

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