Sterling and euro at record highs, while the US dollar continues to take a beating

Tom Tong02/Jan/2014Currency Updates

GBP

We entered the new year with a bang, fireworks lit up the city and sterling did much the same with the pound skyrocketing against the dollar. The gains continued to hold and presently the pound is trading around a 3-year highs against the greenback. Against the euro, gains were also notable with the pound nudging up half a cent. The Asian session predictably involved sterling dancing around resistance levels against its most traded pairs. London opens with sterling well supported. Inevitably, chatter brews over whether sterling is over extended. However, right now it is a paradoxical situation as data out of the UK remains rosy.

In 2013 UK economic growth came in at 1.5%. The bullish sentiment is gaining momentum with 2.5% – 3% growth being widely called for 2014. As ever, key sterling drivers will be – unemployment levels, the words and actions of the BoE, and macro and micro data out of the UK.

Data of note out of the UK today – Markit manufacturing PMI for December with a slight dip expected following the previous highs.

EUR

Euro gains against the dollar continue, whereas against the pound it continues to trade at high levels despite a minor slip yesterday. London closed last Friday with the euro punching to its highest in 25-months against the dollar. Predominantly, this stemmed from banks buying the euro. The ECB is undergoing an asset quality review of the eurozones banks for the year end 2013. This will be used to calculate if any fresh intervention is needed. Therefore, we saw increased demand for the euro as banks rushed to shore up balance sheets. 2013 also saw the euro as the best performing currency worldwide.

Welcome Latvia to the eurozone! Yesterday the nation became the 18th member to take the euro as currency, which also proves the wider appeal that eurozone membership and currency uptake holds to many nations.

Right now the market is taking the eurozones pulse. 2013 was a rough time politically and economically, however the eurozone continues to battle towards growth. Clearly, the situation is now different from when Draghi pledged he will do “whatever it takes” to beat the slowdown and threat of deflation. The euro has proved incredibly resilient throughout. Regardless 2014 is going to be interesting and the market will continue to hold its stethoscope over the eurozones economic pulse.

Data of note out of the eurozone today includes – Markit manufacturing PMI for December.

USD

The greenback has dipped over Christmas and New Year. Initial gains ensuing from the announced $10bn taper were minimal and quickly reclaimed. The euro has punched up against the dollar following the ECB asset quality review leading to increased euro buyers. Sterling gains have stemmed from a solid run of data out of the UK, leading to a sterling rally underpinned with widely bullish sentiment. Yesterday was the same story with the euro and sterling well supported and the dollar caught slipping.

Aside from developments over the past fortnight the dollar is still well placed to snap back these losses. Indeed, many feel that both sterling and the euro are overextended against the greenback. Ensuing dollar rallies will rest on macro data out of the US and the actions of the FED. The lead up to the January FED meeting will doubtless cause excitement with many expecting another round of tapering for February. Later this month eyes and ears will swing to the White House with the market hoping that the budget ceiling deal is ratified. Hence, adverting another chaotic partial government shutdown.

US stock markets continue their bullrun. 2013 has seen the recession losses almost reversed and constant record breaking home runs in the build up to the New Year caused massive excitement. The question now is whether 2014 will bring another record year, for example a 27% rise in the Dow is clearly going to be tough to beat-bulls and bears are split right down the middle.

Data of note out of the US today includes – Initial jobless claims for December, Continuing jobless claims for December and Markit manufacturing PMI.

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Written by Tom Tong

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