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Round Up – Euro, GBP & USD

James Boston
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The Euro received a welcome bounce this morning on the back of a 4 day losing streak. The Eurozone Purchasing Managers Index (PMI) for December caused a positive surprise, the figure of 54.0 was well received following the previous months 52.7, and also slightly ahead of the market expected number of 53.9.

Reinforcing this encouraging data was the publication of the combined Eurozone Q3 2013 budget deficit, this has fallen to 3.1%, a level not seen in over 5 years.

The upbeat economic reports were enough to push the Euro back above 1.35 vs the US Dollar although this momentum was short lived and the single currency has once again fallen back to settle in the 1.3490 to 1.3500 range.

Since peaking at 1.3803 late last year the EURUSD has continued to set lower highs and lower lows in what has become a well defined down channel. A similar story is playing out for the Euro against the British Pound, the upper bound of a pronounced downtrend in EURGBP is also being tested today on the combination of the stronger than expected euro data and a disappointing British PMI figure.

The failure to break higher should not be taken as a sign to question the validity of the Eurozone economic recovery, it is more likely positioning ahead of the upcoming European Central Bank (ECB) policy meeting.

A low inflation report has lead to speculation that the ECB may not yet be done with monetary loosening. Most economists agree that there is little scope for any rate reduction when the ECB meets on Thursday, but this is in contrast to recent moves in the Euro yield curve which is now pricing euro funds approximately 15bps lower.

Any cut this week would certainly cause surprise in the markets, more likely we will be in a situation where the Draghi statement will be analyzed closely for signs of willingness on the part of the European Central Bank to go for one more cut before considering any reversal of its loose monetary policy position.

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