After the volatility of last week the trading week has got off to a rather subdued and slow start. Much like the London Underground this morning. EUR/USD after its recent free fall has reverted to some range bound trading in the overnight Asian session. I remain bearish on EUR/USD and I expect us to now test the 1.32 level to the downside. Why? The likelihood for more EUR weakness, the problems of the Eurozone still remain. High levels of Government debt, lack of competitiveness from the ‘southern sunshine countries’ resulting in high levels of unemployment and reduced GDP – think Greece and Spain. What has the Eurozone tried to do to ‘fix’ the debt crisis? Impose austerity cuts and for the peripheral countries to engineer/force down their interest rates to low levels. If deflation is perceived as likely to occur, and there is now more widespread talk of this being a real possibility, then consumers are likely to hold off making purchases/investment and wait for falling prices, then the Eurozone is back in a precarious position. The rate cut was seen as an attempt to avert deflationary pressures. I’m also of the opinion, and have been for a number of years now, that the EUR is overvalued against the majority of currencies. The EUR has been remarkably strong, however to encourage an export led recovery I believe a weaker EUR will come into its own gradually. Germany, as always, hold the key to the improvement of the Eurozone. I can’t see them embracing a weaker EUR so round in circles we go again with the Eurozone likely to be in difficulty for numerous years yet. I remember in 2009 people saying we’ll be back to ‘normal’ in 5 years. Anyone else think we’ll be back to ‘normal’ next year?So, what does all this EUR chatter mean for GBP/EUR? We’re hovering around the mid 1.19’s with a break to the upside and through 1.20 remaining challenging. I would suggest placing market orders to purchase EUR from GBP at 1.1950/1.1975 and 1.20. Unless we see another sustained drive to push the EUR down I think settling above the 1.20 level will be hard to maintain. Contact the trading team to discuss your EUR strategy and we can look to implement these for you.
GBP/USD? Rather dull at the moment. We’ve found some support at the 1.60 level. Sterling will be shaped this week by the Consumer Prices data for October due out tomorrow and more importantly by the BoE Quarterly inflation report and the Bank of England Governor Mark Carney’s speech. If you can achieve 1.60 I would suggest looking at covering off some if not all of your dollar exposure. I think we’re more likely to see GBP/USD settle below 1.60 now with GBP data proving slightly disappointing. I think the push to around 1.6250 and failure to push much above that level has led investors to give up on it for the time being. Selling USD to buy GBP? If you can achieve 1.5950 look to convert some of your exposure at this level and look for further dips to the downside over the coming weeks.
A Monday morning quiz. The prize? A bottle of whisky to be sent to your office or home. What will be the end of year rate on GBP/USD? (End of year meaning 24/12/13). Send emails to your trader and we’ll inform the winner by email. The whisky will ease the stress levels over the festive period!
Have a great week and any questions please let me know.
Written by Liam Alexander.