The pound has started the week in much the same way as it ended the last: on the back foot. Steadily the UK currency is finding its early year gains being eroded as the market reassesses the situation in the eurozone.
To be honest this is a trend that we’ve become accustomed to. The euro started the year a long way from favour amid growing concerns about Portugal. However, following a couple of successful bond auctions and supportive comments from both Japan and China, the euro has staged a recovery. Indeed demand for the single currency from Far Eastern buyers has been particularly pronounced recently. The question now is how far can the euro go before it begins to trend lower once again?
Against the dollar, the euro has climbed to a two-month high this afternoon at $1.3665. However, there is growing speculation that $1.37 will prove too appealing a level for investors to ignore and they’ll start to sell the currency once again. In the longer term the underlying problems embroiling the eurozone are bound to re-emerge and it’d be a brave man who argued that the euro has much shelf-life at its current level.
Turning focus to this week, the economic calendar is filled with high profile announcements. Fourth quarter economic growth figures from both the UK and the US are due; the minutes to the Bank of England’s latest meeting are scheduled; and the Fed will give its first policy update of the year.
This barrage of announcements should keep the markets lively. But for those hoping the pound is on the verge of mounting a full scale attack on €1.20, they’ll have to wait a while longer. Ireland's latest political turmoil, although cause for concern, is far from the catalyst needed to dampen euro spirit. Even higher UK interest expectations are struggling to lend much support at present. When the argument is fully explored, it’s still pretty unlikely that the Bank will nudge; how is a 0.25% hike going to curb rising oil prices exactly....?
Duncan Higgins
Senior Analyst – Caxton FX
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