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Euro hits 10 weeks high against sterling

Euro hits 10 weeks high against sterling

We witnessed some sharp re-adjustments yesterday on the back of the MPC meeting with an immediate sell-off of Sterling. GBP/USD dropped below $1.5650 and GBP/EUR now resting around the 1.1800 level.

The outlook for monetary policy is back in focus for the Euro with the outcome of an agreement on the second Greek bailout package. Indeed, prices are showing an increasingly significant correlation with the benchmark German 2-year bond yield. Today, all eyes will be on the German IFO business confidence survey. This is really a general gauge of the present climate and what to expect rolling forward.

The results of this may offer some short term support for the Euro on expectations that cautiously improving economic data may ward off any rate cuts in the near term. Indeed, information suggests Euro-area data releases have tended to have surprised the market by increasing margins since mid-January. The markets now price in a 58 percent probability of a 25bps cut in the benchmark lending rate at the next ECB policy meeting on the 8th March.

Today, the IFO German business climate indicator, the US property market and US jobless claims have market moving potential. After yesterday’s disappointing German PMI, markets will look out whether the IFO can disconnect from the setback in the PMI’s. Of late, the market had to some extent discounted the idea that the economic decline in Europe might not be as deep as expected. This theory was questioned yesterday. So, an IFO report in line or better than expected might again be slightly supportive for the Euro. In the US, the jobless claims are expected to tick up slightly from last week’s sharp decline. We continue to put the risk for a better/lower than expected figure.

However, from a currency point of view, it is still far from clear whether markets will play the card of sentiment on risk or whether they will buy US economic strength. There is probably a much better than expected figure needed to trigger outright USD buying. So, we assume more range trading within this week’s rather tight range. The 1.3322 should hold. We have to admit that we also expected the 0.8422 range top in EUR/GBP to stay in place without high profile news. With the market still short euro, the risk of a short-term short squeeze can not be excluded even as we don’t like such a reaction in the run-up to next week’s 3-year ECB LTRO.

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