The market is making adjustments after yesterday’s excessive moves. The euro is coming under broad-based pressure this morning, while WPP (LON:WPP) is up more than 2% after Wednesday’s 12% decline on the back of another results miss. The pound is also catching a bid as the market looks to the second reading of GDP and better than expected trade data.
Euro strength? It’s all about the politics, stupid
The great and the good of the central bank world will gather in Jackson Hole today, but tomorrow is the key day to watch. Yellen speaks at 15:00 BST, while Draghi speaks at 20:00 BST. The market is expecting to be disappointed by Draghi, who is unlikely to give anything away about tapering the APP with EUR/USD hovering around 1.18 and EUR/GBP at 0.92. We still think that the structural story is in place for a stronger euro for another couple of months’ at least. Firstly, the economic story in the currency bloc remains strong and broad-based, while the political risk has moderated. This is in contrast to the UK and the US where heightened levels of political risk threatens the economic outlook.
What can disrupt the EUR/GBP runaway train?
While EUR/GBP is looking overbought, the trend looks like a runaway train and it’s difficult to go against it. From a fundamental perspective, today’s GDP data could give the pound a short-term bounce. The market is expecting a 0.3% reading for Q2, which would be unchanged, the annual rate is expected at 1.7%, which is not fabulous, but it also suggests that the UK economy is not falling off a cliff. This could ease some of the selling pressure on the pound in the short term.
Watch exports, the market expects a 1% increase on the quarter, which would help to erase the 0.7% drop in Q1. Anything weaker than this would be a big disappointment, as it would suggest that UK exports may never get the boost that was expected from last year’s devaluation in the pound. For the pound to bounce significantly, we also need to see services perform well, and for investment to fall less than expected, thus, it is a big ask for today’s GDP data to give the pound a much-needed lift in the longer term.
Tory Party Conference risks mount
Overall, we think that it could be tough for the pound to rally this autumn until we get the Tory Party conference out of the way in October. There is some fear in the FX market that Theresa May could be ousted at the conference this year, which is also keeping a lid on GBP gains. Whether we can break back above $1.30 in the near term could depend on how “hawkish” Yellen is in her speech tomorrow.
WPP recovery, but still an existential crisis
Asian and European indices are mostly higher as we lead up to Jackson Hole later today. We expect global indices to mostly drift into the conference, although there have been some pockets of volatility. WPP is in recovery mode today after its share price fell by the most in nearly 20 years on Wednesday after a weak Q2 earnings report and another earnings downgrade for this year. Although Martin Sorrell tried to blame global trends on WPP’s fate along with political risks, there can be no hiding the fact that WPP is facing an existential crisis, and traditional advertisers will find it harder and harder to build profits and keep key clients in the face of digital disruptors like Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB). Thus, although WPP may retrace further, potentially reversing 5% or so of Wednesday’s move, the structural picture remains weak for WPP, and it is hard to see how it can return to its February highs without a serious change in direction.
Trump still a risk for the peso
Looking ahead, UK GDP data is likely to be dominant this morning, however, we expect the market to lie in wait for Jackson Hole titbits in the next couple of days. Trump is also in focus, his threat to shut the US government if the Democrats (and some Republicans) don’t agree to build his wall with Mexico, has weighed on the Mexican peso, and US stocks ended lower on Wednesday after rating agency Fitch said they would review the US’s credit rating in the event of a US government shut down. This is a theme that is set to run into September/October and is gaining traction already. This could keep US asset prices volatile.
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