Last week was a EUR story as the single currency continued its march higher. Is EUR/USD going to break 1.40 the figure this week? Yes. Why? I think a range of 1.40 – 1.45 sits comfortably with the ECB in relation to their Interest rate mandate of around or below 2%. I think they would prefer it closer to 1.40 than for it to rise to 1.45 as it would then start to put real pressure on the peripheral economies of the Eurozone with a strong EUR being far from ideal. As Draghi has intimated recently, the EUR is becoming increasing relevant, but as usual downplays that the exchange rate is a target. Price stability is now a concern for the ECB and should inflation expectations become “unanchored” then additional monetary policies will be used to combat these.I think we’ll see a push above 1.40 however I don’t think we’ll hang around too long above there. Since February we’ve moved 5 big figures from 1.34 to settle around current levels of 1.39. I don’t see the upside continuing at the same pace on EUR/USD.
Why will EUR/USD push lower and retrace recent gains? In three words – A US revival. I’ve been an advocate of US Dollar strength for Q2 through to the end of the year since the end of 2013. Yes, we’ve had poor weather throughout December through February mainly in the Midwest and even in the sunnier Southern US states however this has now dissipated and with the joys of Spring comes a ray of light for the US economy. Indeed, Durable goods, PMI data, New Home Sales all printed better than market expectations recently. CPI, Retail Sales and the recent employment data were all on the button in terms of market/analyst’s expectations. So what do we have out this week that may change the direction of EUR/USD? It’s a pretty dull calendar this week however the main day that market attention will be focused on is Wednesday. The Federal Reserve are meeting on Wednesday in the US. They will be releasing their policy announcements however of more interest will be their Economic projections. This will give us an idea of their Inflation and GDP expectations. This in turn gives us an idea of how they benchmark their policy decisions. Any change and we could see a change in the direction and strength of the US Dollar. We’ll also get the individual members of the Fed’s interest rate forecasts. If interest rate expectations change then expect a sudden market reaction to it.
Wednesday will be the most volatile day of the week for USD. Are you a seller of Sterling and look to purchase USD? We’ve settled into a range on GBP/USD however I expect a downtrend to commence and we’ll be back to 1.63/1.64 again in the coming weeks. If you can lock in your USD for the remainder of Q1 and some of Q2 I would suggest that these levels are very attractive to buy at. Contact myself or one of the trading team to discuss either executing a Spot transaction or look to cover off your USD on a 3 or 6 month forward contract. Think GBP/USD will continue its upward trajectory? Contact one of the trading team to have a conversation on appropriate and achievable levels.
GBP/EUR? I think we’re going to be quite range bound this week. 1.19 to 1.20 being the range. If you have a EUR requirement to purchase look to place a market order at 1.20 to execute. I don’t think we’ll see it much higher than this due to the continuing EUR strength and general bearish mood on the Pound at the moment – think interest/fx rigging etc etc. As suggested above we’ll see EUR weakness this year though and this should push GBP/EUR back above 1.22/1.23 into the summer months. However, although everyone seems to be a bit ‘doom and gloom’ at the moment on GBP/EUR it’s important to keep a sense of perspective on where we’re trading at. We’ve been used to, over the past few years certainly, to levels of 1.15-1.18 being considered the ‘norm’. Looking at things from a recent historical perspective we’re at the higher end of the range on GBP/EUR. If you can secure some on a ‘Spot’ basis at anything above 1.19 you’re still, I feel, getting ‘fair value’.
The most important event for Sterling this week is the Budget on Wednesday 19th March. It will be interesting to hear George Osborne and Ed Balls no doubt trade blows on the direction of UK PLC.
If you have any questions please let me know.
Have a great week.
Written by Liam Alexander