Hola amigos,
Well, only 39 shopping days left until Christmas and the question I keep getting asked is where I see GBP/EUR headed by then. I personally feel that GBP/EUR is in an upward trend however the language from the Bank of England is holding it back, trying to hold the pound low. After Christmas sterling could start to rally. 1.1500 is my short term target.
Last week was another typically volatile week for GBP/EUR where we saw sharp upswings and then downturns but ultimately finished up at the same levels. There is little direction in the GBP/EUR trend of late as the market cannot comfortably be bullish on sterling or the euro and so hence we get extreme volatility within the current range. At the moment we are pegged between 1.10 and 1.1250 and I cannot see a move out of this range in the short term.
Looking at the start of last week the pound was off to a flyer like a greyhound out of the traps. It was helped with attention on the Kraft/Cadbury developments which from a merger and acquisition perspective would potentially lead to buying of the pound; however this did not transpire and the pound started to fall as a result. Still overall the pound was trading in a strong position above 1.11; however it was hesitant ahead of plenty of risk events with UK unemployment and the Quarterly Inflation report on the economic menu. What the market was not expecting was for credit agency Fitch to throw a huge curve ball into the mix at 5:18 on Tuesday morning- Fitch said that the UK was most at risk in the major economies of losing its AAA sovereign rating, with Germany being the least likely. As you would expect, this sent GBP/EUR careering lower into the mid 1.10 levels with the crucial barrier of 1.10 under threat.
It was not looking pretty for the pound ahead of potentially damaging unemployment data and the Quarterly Inflation report where afterwards the ever cautious Mervyn King would get the opportunity to discuss the economy. However as it transpired the UK October jobless claims and unemployment data was actually better than expected with unemployment coming in at 7.8& against a forecast of 8%. This helped the pound move higher although nervously with the inflation report to follow. The inflation report was actually not too bad when taken into context over the last six months; inflation was earmarked to rise and growth forecasts were upped. However the pound weakened relating to the facet that the Bank were keeping an “open mind” on further Quantitative Easing and also stating that the weaker pound was a key driver for the UK economy. It seems the Bank is still treading tentatively and is taking no chances. We had little data for the rest of the week for sterling; sterling has held firm after falling yesterday holding above 1.10 against the euro and 1.65 on the USD. The market will want to see continued improvements in economic data following small improvements in manufacturing, jobless claims and housing data.
Euro zone GDP came in at +0.4% which is slightly weaker than the expected +0.5%; this has not really affected the euro as the data was fairly in line with expectations. Yesterday the ECB bulletin was broadly optimistic and it was maybe the uncertainty on inflation that has deflated the euro. EUR/USD late on Friday has edged back up to the 1.50 level and this is largely supportive of euro strength against the pound.
Looking at last week as a whole we have seen largely encouraging data for both the UK and the eurozone and the market is not being swayed to be more bullish on either and we finished at 1.1150. This week we have the Bank of England minutes which will hopefully offer insight into why the MPC did not expand QE by 50 billion and whether there is likely to be further imminent expansion. The pound survived what was a potential banana skin in last weeks’ unemployment and inflation report. In theory the worst should now be behind the UK economy with the market looking for a return to growth in the last quarter. This should consolidate sterling on the downside and in time form a base to move higher…
Hasta la proxima!
Kind Regards,
Keith Spitalnick
Business Development Manager
Currencies Direct Limited
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