Will EUR/USD hit 1.40? We posted a 2014 high of 1.3914 after the ECB president, Mario Draghi, spoke on Thursday. As expected, the ECB kept the main interest rate at 0.25% and held the overnight deposit rate at zero. There was some chatter that this may go into negative territory however he held his course. The commentary from Draghi however was more encouraging than the market expected as he said, by and large, the news that has come out since the last monetary policy meeting has been positive therefore there’s no real need to push the economy on as the recovery is broadly on target. Hmmm. Excluding the manufacturing powerhouse that is Germany and their improving economy I still think we’re a million miles off a full recovery in the Eurozone. The EUR has, is, and will probably continue to defy logic and remain in its overvalued state for the time being. If someone can tell me that France and Italy are surging ahead and on the road to recovery I’ll eat my hat. French Industrial production fell by 0.2% today against an expected rise of 0.6%. Trade balance weakened and consumer spending declined. This points to a weak consumer confidence and in turn shows that the French people think they’re far from being back to pre-crisis levels. The EUR has come off slightly against the dollar today however it is still flirting with 1.39. I would expect a push through the psychological level of 1.40 at some point. Do I think we’ll settle above 1.40? I don’t think we’ll hang around too long there. We should see EUR/USD come off with a gradual retracement back to levels that have some semblance of reality around 1.32 on EUR/USD.I still maintain we’ll see sustained USD strength this year and that we’ll see EUR/USD back to around 1.30 the figure. Yes, the figures out of the US on Friday were mixed at best with the unemployment rate shifting up to 6.7% against a consensus of 6.6% however there were 175 thousand new jobs added. We should see tapering continue next week. The figures were better than market expectations with many predicting a downturn due to the bad weather the US has suffered in the past couple of months. With the stronger than expected figures posted we should see a continuation of ‘tapering’ by the Federal Reserve next week at their meeting on 18th-19th March. Indeed, it would take a pretty full on downturn for the Fed to not start pulling some support from the economy. I expect the US economy to outpace the Eurozone this year with that in turn leading to a stronger US Dollar.
Where now for GBP/USD? I think we’re quite toppish on Cable now and I don’t see 1.70 being hit. There will be a lot of resistance around the mid 1.68’s before we come close to breaking through the psychological level of 1.70 being broken. If you’re a buyer of USD from GBP it may be an idea to cover off the remainder of your Q1 exposure and start to think about Q2 and the levels you’re looking to price yourself in at. I would suggest anywhere above 1.60 is still considered good value on GBP/USD as I think towards the end of 2014 the interbank rate will be back to around 1.60. Do you think GBP/USD will continue to push higher with the green shoots of recovery in the UK continuing apace? If so, perhaps consider placing a market order to take advantage of any spikes on an intraday basis or on the overnight Asian session. Please contact myself or one of the trading team to discuss appropriate target levels and to implement a market order.
GBP/EUR? This may surprise you all however we’re back under 1.20 the figure. Shock. GBP/EUR hangs around 1.20 about as long as the sun does in the UK. As stated above I think the single currency is overvalued so we should see GBP/EUR push higher again. If you can achieve 1.20/1.2050 on a market order I would suggest this is a good level to achieve. Yes, GBP/EUR should be higher however we know how resilient the EUR is. If you can ‘average up’ your rate through a market order you’ll be in a good position in terms of your rate of exchange. Please contact myself or one of the trading team to discuss your upcoming requirements.
On the data front it’s been a fairly dull start to the week with only the aforementioned French data being of note. Out of the UK tomorrow we have inflation report hearing which should provide some volatility for Sterling. On Thursday we have Mario Draghi speaking as we have the ECB monthly report released and we round off the week with Retail Sales released from the US followed by the Reuters/Michigan sentiment index on Friday.
We’ve broken out of the dull range bound trading that had prevailed for the previous couple of weeks which has provided a few more talking points. I would imagine the markets will settle down a little this week and we may trade in a 50-75 pip range on GBP/USD and also GBP/EUR. To take advantage on any spikes I would suggest placing market orders this week.
If you have any questions please get in touch.
Have a great week.
Written by Liam Alexander