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Sterling Surges Against the Euro Hitting a 2-year High

David Becker
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Sterling Surges Against the Euro Hitting a 2-year High

Sterling is consolidating Thursday’s gains after hitting a fresh two-year high versus the euro. The surge in Cable was prompted by Carney’s remarks, which while overall quite balanced spelled out that a rate hike is “getting closer.” Carney’s comments contrasts with Draghi’s “risk of doing too little outweigh risks for doing too much” speech this week.

The GBPUSD is consolidating around 1.6300, and is looking increasingly likely to be set for a period of broadly directionless trade in the low-to-mid 1.60s. Despite an economy that is robust, the interest rate differentials between the pound and the US are remaining stable. This also contrast with interest rate differentials between the UK and the Euro zone which is now widening even further.

Sentiment in Europe continues to fall, which was reflected again Friday. German GfK consumer confidence dropped to 8.3 in the October reading from 8.6 in September. This was a sharper than expected decline and likely reflects not only the negative economic headlines, but also the mounting uneasiness in Germany over the ECB’s low interest rate policy and focus on crisis countries, which is hitting German savers.

This follows Thursday’s weaker than expected IFO survey. The breakdown, which is only available until September shows a sharp drop in business expectations as well as the willingness to save. The willingness to buy also dipped, despite the fact that price expectations declined again. The overall index remains at relatively high levels, but the breakdown clearly is a reminder that private consumption alone will not save the German recovery.

The EURGBP currency pair hit a two-year low and is poised to continue to experience negative momentum. The MACD (moving average convergence divergence) index is printing in negative territory with a downward sloping trajectory. The RSI (relative strength index) moved lower with price action reflecting accelerating negative momentum while printing a reading of 32, which is on the lower end of the neutral range.

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