Sterling continues to hold strong support. Eyes on today's inflation report

Tom Tong18/Feb/2014Currency Updates

GBP

Sterling dipped briefly on Monday after skyrocketing over the Asian session to 5-year highs against a trade weighted basket of currencies. Following the highs we saw widespread profit taking from investors unwinding long sterling positions. London closed with the pound caught slipping against the dollar, trading against the euro was fairly flat with some minor losses. Sterling remains within striking distance of 5-year highs against the dollar and continues to bounce around yearly highs against the euro. Despite whispers of gains being overextended, hot money continues to back sterling with yesterday seeing heavy buying following dips.

Despite the intraday retreat, a bullish outlook remains firm as investors position for impending M&A inflows and the BoE interest rate hike, which continues to keep the market guessing over its likely timescale. Overall the pound was the best performing currency across the board last week and remains the darling of the currency markets. Last weeks highs were a combination of expectations brought forward over the BoE interest rate alteration and a revision of forward guidance, the rally was further reinforced by UK data consistently beating market expectations and the UK post recession recovery is now officially the quickest among the developed world.

Housing market data yesterday again came in on the upside. The average house price now weighs in north of £250K. The inevitable chatter over a recovery based on the housing market resonated through the media. However, both the BoE and Government ensure they are keeping close watch on the situation.

CPI Inflation data set for release today, a fall from January’s figures is expected, a softer than expected reading could mean lower interest rate for longer which will lead to sterling pivots.

EUR

Muted day for the euro with no real data of note and markets continuing to price in a reaction to last weeks events. London closed with the euro up against the pound and fairly flat against the greenback.

Most excitement stemmed from the Euribor rate remaining the same and the ECB proclaiming that negative rates remain a possibility. The key euro priced bank to bank lending rate held steady on Monday after last weeks data showed surprisingly stronger than called growth in Germany and France which helps kick up overall eurozone growth for Q4.

Draghi earlier this month eluded to economic growth figures as a critical piece of information to consider prior to taking fresh policy action at its upcoming March meeting. Friday’s data parred the downward pressure on rates that grew clout following an ECB member commenting that the consideration of negative rates was now increasingly serious. It was only January that Draghi said an unwarranted increase in short term money market rates and a deterioration of medium term outlook for inflation could trigger more policy action.

Admittedly, bankers, politicians and the man on the street all appreciate that negative rates are an extreme measure. However, the eurozone is still in trouble and faces continued risk from wider turmoil in global markets, the slow pace of growth and introduction of reforms. Therefore the ECB has to keep the market aware that negative rates remain possible.

Data releases of note today includes – eurozone current account figures and ZEW economic sentiment.

USD

A domino effect of poor US data pinned the greenback next to 6 week lows against a basket of currencies on Tuesday. The dollar index hovered near its lowest level so far this year, on the flip side gold and silver saw solid gains directly correlating dollar weakness.

The disparity between US stocks and the dollar continues to puzzle. The Dow and S&P have been on a trending bull run and are still primed at levels that following a sustained rally could see them tip record highs. It appears US stock investors are simply viewing the recent roll of poor data in a far more favorable light and placing significant blame on the polar storm.

The market continues to speculate on the inner thoughts of the Fed, more clarity will be provided on Wednesday when the Fed publishes the minutes of its last policy meeting. Whilst some investors continue to talk of a potential slowdown in tapering the majority expect the tapering to remain the same with the Fed reducing QE monthly in clips of $10bln.

Data releases of note today include – NY state manufacturing index, Redbook index also bill auctions.

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Written by Tom Tong

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