EUR, GBP, scandi flows: EUR and scandis firm as risk sentiment recovers

Europe faces a very bare calendar and with equity futures rallying modestly overnight the momentum of yesterday’s equity decline has faded, making it hard to find a driver for today’s trading. However, the EUR and scandis are starting the session strong, gaining ground across the board as the impact from yesterday’s weak equity markets fades. The SEK continues to be the best performer in these more risk positive European conditions, clawing back some of yesterday’s losses against the EUR and NOK, but after yesterday’s strong gains following the Norwegian CPI data, the NOK looks likely to broadly keep pace with any SEK strength.

EUR/GBP has hit its highest level since January 24 at 0.8429, and still looks to have some further upside potential based on the movement in yield spreads, the weaker risk environment, and the generally soft USD performance that tends to mean GBP also slips back against the other European currencies. While the UK is also likely to increase spending to deal with the new defence demands created by the weakening of US support for Europe, the fiscal stimulus looks unlikely to be as large as that in Germany, in part due to the limits imposed by the UK budgetary position, with some of any increased spending likely to be clawed back in cuts elsewhere. There is consequently scope for yield spreads with the Eurozone to narrow further and pull EUR/GBP up towards 0.85, and potentially beyond.