Currency Market Update- 13th August

Friday 13 Aug @ 1615: EURUSD – 1.2760: EURGBP – 0.8189 (Fri 30 July: EURUSD – 1.3285: EURGBP – 0.8331)

European data points to three speeds now in the Eurozone, the BOE sounds more cautious over UK growth.

EURUSD
The rate lurched 300 points lower on Wednesday alone this week, a huge move in FX terms. A three tier Eurozone is now a reality, one more than the previous two tier. Today the GDP results were as follows: Germany 2.2% quarter on quarter growth, Italy 0.4%, France 0.2%, Spain 0.2%, Greece -1.5%, Eurozone as a whole was 1%. Ireland was back in the news after Irish Banks continued to bleed losses, with yields on Irish 2 year bonds spiking mid week. This reminded markets that there was more to the Eurozone than Germany.

US Data was no oil painting either, with retail sales down, weekly unemployment data picking up and the Deflation word reiterated several times. Deflation (falling prices) will lead to low yields on the Dollar and weakening. The Federal Reserve also on Tuesday stated they were ready to buy more bonds as a shot in the arm for the US economy. USD/Yen has been interesting in recent weeks, against which the Greenback has flirted with 15 year lows.

Outlook – The call we made for EURUSD to move lower, finally took hold mid week. It was not on the back of improving US data but rather the resurfacing of European debt problems and continued scepticism over the European Banking system. Getting the economic policy for this rag bag of European economies will be extremely difficult for the ECB in the months ahead. It is likely we could see 1.25 quite soon.

EURGBP
The inflation report told us this week that the BOE is still adamant that the inflation outlook in the UK will remain low in the medium term. The BOE also highlighted the uncertainty surrounding UK recovery and stated that a normal recovery was ‘several years’ away. It also cut its average growth expectation to 3% per annum from 3.4%. Government spending cuts and VAT increases are likely to keep the lid on last quarter’s explosive growth.

BOE Minutes are released next Wednesday and any evidence of further splits in the inflation/ disinflation camps will be closely watched for. The other thing to keep an eye out for is QE. The BOE have made hints that they will continue to juice any faltering economy with more cash.

Outlook – The Pound is still undervalued and EURGBP is likely to continue lower.


Source: Blue FX Markets

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