There is still an overall positive tone for the pound as we continue to trade near 2 year highs.
Foreign Currency Market Update – GBP / EUR Update
Sterling remains anchored to the 1.20 area, petulantly probing at each end of its two cent range for the last few weeks but clearly in no mood to make a decisive breakout in either direction.
January’s Jobless Claims data showing that the British claimant count had risen by 6,900 – more than twice the expected level last month. Tuesday’s CPI Inflation numbers showed that the rate of UK price rises had fallen to an annualised 3.6%, as per expectations. This makes the chances of a near-term Bank of England interest rate rise even more remote, placing further downside pressure on Sterling. However, as the figure was already expected there has been no visible impact on the exchange rate. The week ended on a slightly brighter note for the Pound, with the release of the latest UK Retail Sales numbers, which showed an unexpected increase of 1.9% in the level of British shop sales last month.
Eurozone Gross Domestic Product sank to -0.3% in the fourth quarter, but kept in the black for the year to date at 0.7%. The ECB’s monthly report last week cited “tentative signs of a stabilization in economic activity at a low level”, predicting mild recovery through the course of 2012. There was also a warning that tighter fiscal rules must be observed by member states. Eurozone finance ministers meet in Brussels today to discuss the Greek bailout which is yet to be fully agreed. Greece need €130bn to avoid default in mid March when a large repayment becomes due. A €110bn tranche was paid in 2010 but wasn’t enough to plug the hole, which currently stands at 160% of GDP. Eurozone ministers want this figure cut to 120% by 2020, and Greece have implemented a searing series of austerity measures in an effort to achieve the target, provoking rioting in Athens last week. The bailout will probably be passed, but there remains a question mark over whether the austerity measures will be enough to bring Greece’s public finances bank into line, and also over how the Eurozone can apply sufficient pressure to ensure the Greek government stick to new fiscal rules.
* Denotes the importance of the data item *** being the most important
*** The all important meeting of EU finance ministers begins at 2:30 today.
** Tuesday morning sees the release of January’s UK Public Sector Borrowing figures – they are expected to show that the British government managed to pay off £6.3bn of its debt last month – a lower number than this could hurt Sterling.
* Eurozone Purchasing managers index at 09:00 on Wednesday
*** Wednesday morning’s release by the Bank of England of the minutes of its February MPC meeting will be closely-monitored by analysts for clues on the future direction of British monetary policy.
*** Friday morning sees the release of the official Q4 GDP figures for the UK economy – a quarterly contraction of 0.2% is expected. Anything worse than this could spark a Sterling sell-off.
** Germany – Q4 growth data at 07:00 – expected to show -0.2%
There is still an overall positive tone for the pound as we continue to trade near 2 year highs. The next key level is the Q1 2010 highs around 1.2250. A break above there would open up the giddy heights of 1.2500. A lot depends on the market’s perception of the results of the Greek bailout. Despite the apparent lack of volatility over the last few weeks clients should remain cautious. A long period of narrow trading ranges usually concludes with a big breakout. The short term trend supports the argument for a stronger pound but we keep an open mind.
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