Friday 23 July @ 0945: EURUSD – 1.2953: EURGBP – 0.8420 (Fri 16 July: EURUSD – 1.2940: EURGBP – 0.8435)

The Euro was centre of attention again this week, with bank stress test results being released this evening at 5 and news about Ireland and Hungary earlier in the week setting a nervous tone for the week.

The US also shed some light on plans to deal with its ‘uncertain’ economic outlook, hinting that more easing cannot be ruled out from the world’s largest economy.

EUR / USD
Basically flat on the week with plenty of gyrations in between. It cemented gains above 1.30 early in the week, shaking off concerns about the IMF spat with Hungary and a downgrade of Ireland’s credit rating. It also slid quite quickly below 1.28 and made a run for 1.27 later in the week. However, the Euro’s story is largely about an improving economic mood in Europe.

Robust German growth is offsetting weakness elsewhere but figures in the region as a whole are impressing. Eurozone Purchasing Managers Index rose in July, industrial orders were up 3.8% in May from April and consumer confidence in Eurozone rose sharply in July according to the European Commission. In short, growth prospects are being revised upwards, which is unique globally. Risks to this growth are a stronger Euro (up 8% in the past few weeks) making goods more expensive and faltering growth elsewhere, most notably in the US. The Fed chief this week revealed concern over the ‘unsatisfactory’ recovery in the labour market. The Fed now sees unemployment falling slower than previously expected, leaving it at 7.5% at the end of 2012, as opposed to 7%. Traders are now pricing in a 30% chance of a rate hike in the US by next April – down from 78% on 1st July. As always, any comments regarding unemployment or housing in the US need to be watched carefully.

EUR / GBP
On Wednesday the focus was on BOE minutes. These showed, as expected, a split of 7-1 in voting for an interest rate rise (inflation stubborn high). Speculation it could have moved to 6-2 pushed the cross to 0.8360. Comments from BOE members this week also highlighted the uncertainty surrounding the UK economy with rising inflation, unemployment, and weak growth.

One member (Dale) cited stubborn inflation would stay above the 2% target until the end of 2011 and that a rate rise before the end of this year was possible (Pound Strengthening). On the other hand, another member (Posen) cited weak growth as a reason for further Quantitive Easing (Pound weakening).

Outlook: The BOE and Fed have both made pointed references to uncertainty in the economy. It should come as no surprise as sovereign debt remains a problem, banks are underfunded and European ‘greenshoots’ rely on export growth to both of these markets. EURGBP is likely to move lower as inflation pressures outweigh weak growth for the BOE – when this starts to happen is hard to judge. EURUSD is also topping out at the 1.30 level – if it going higher it will have to be today or Monday on the back of the Bank stress test results. If it doesn’t breach 1.30 for a sustained period, it is likely that the short Euro trade might return.

Source: Blue FX Markets

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