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Round Up – Dollars, Euro and Sterling

James Boston
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The British Pound continues to gather momentum as the markets grow more confident that the Bank of England will vote to raise interest rates, possibly as soon as Q2 this year. As I discussed yesterday the Bank’s Governor, Carney, set a target unemployment rate of 7% as the level at which the British Monetary Policy Committee would consider a reversal of the multi-year monetary stimulation program. The recent surprise unemployment figure of 7.1% has made a rate hike almost inevitable; the questions now are by how much and by when? Regardless of the pace of monetary tightening, the prospect of a rising Sterling yield curve is directly contributing to investor speculation on the currency, GBPUSD 1.70 is now a realistic near term target.

EURGBP 0.75 also has to be considered achievable although somewhat of a bigger ask as the single currency is beginning to display signs of strength in it’s own right. The high risk premium that has been weighing the Euro down over the past 3 years is starting to dissipate. After coming close to dissolution 18 months ago, consensus is now forming that the Euro has survived it’s toughest test to date and that the risk of a breakup has now receded to near zero. Currently trading at 1.3630 the Euro is off it’s recent mid term high against the US Dollar of 1.38, this should not be interpreted as a sign of Euro weakness but rather as a short term sign of Dollar strength brought about by the unexpectedly strong US employment news. In the coming weeks it is very likely that the EURUSD will retest the key 1.38 level, this will be the 3rd attempt by this currency pair to break out higher and on the balance of probability I would expect it to succeed, particularly in light of the renewed confidence in the Euro and the US Feds reluctance to reverse it’s tight monetary stance.

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