Morning Report

Richard Driver, Analyst It has been a remarkably good week for the euro, which has benefited from solid bond auctions in the eurozone and some potentially positive developments such as increased IMF funding. Hopes of a deal between Greece and private bondholders are continuing to build, which again is supporting the euro. Today’s calendar brings the monthly UK retail sector growth figure, which is expected to bounce back after last month’s disappointing contraction. Elsewhere, data is extremely thin and the markets will look to rumours on a Greek deal.
STERLING/EURO:Sterling lost further ground against the euro, but our longer-term euro-negative outlook remains unchanged. The euro’s strong week can be put down to short-covering, which isn’t too surprising given its sharp decline of late. Positive results at bond auctions in Spain and France fuelled the euro’s rally. With such decent demand for eurozone debt this week, it appears that the market has not taken too much notice of S&P’s recent blanket credit downgrade. The Greek private sector involvement (PSI) negotiations are the prime focus of the market now. Rumours have emerged that they are closing in on a short-term deal, which would almost certainly see this euro rally built upon. However, as always with EU politicians, there remains a very significant chance of a collapse in negotiations, which would drag the euro down with it. This pair trades at €1.1950 for now.	FORECAST
STERLING/US DOLLAR:Sterling is tracking the euro’s gains against the US dollar, helped by some rare poor US economic data. US data disappointed yesterday, which is a rare occurrence based on the last few weeks. The Philly Fed manufacturing index failed to meet expectations of another monthly expansion, though this will do little change the optimism surrounding the world’s largest economy and its manufacturing recovery. Sterling has climbed by two cents against the US dollar this week and is currently trading at $1.55, which represents a good rate to buy dollars as far as we are concerned. UK retail sales data is the focus for sterling today.	FORECAST
EURO/US DOLLAR:The euro is set for its strongest weekly gain since October and there could be some further upside in the short-term. The euro has bounced impressively from its seventeen month low of $1.2625. This short-covering rally still has some more legs in it, but we should see this pair test lower levels further down the line. Much onus is being placed on the Greek negotiations at the moment but success on this issue will not by itself save Greece; its debt will remain unsustainably high. This pair is trading at $1.2950 and it would be no surprise see this pair jump up above the $1.30 level in the short-term.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling has bounced up off its record lows against the aussie dollar, with the Chinese manufacturing sector remaining in contraction. Chinese manufacturing growth was flat last month, which does little to change the slightly negative outlook for Chinese growth. China looks like it may be able to pull off a ‘soft landing’ for its declining growth, but it still means demand for aussie exports will be lower moving forward. Australian PM Gillard stated yesterday that there is room for the Reserve Bank of Australia to cut its 4.25% interest rate, particularly in light of poor aussie employment figures on Thursday morning. This pair is trading up towards 1.49.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling is building on its recent recovery against the kiwi dollar, aided by weak NZ inflation data. Wednesday night’s kiwi inflation data has hurt the New Zealand dollar and seen it erase some of its recent gains. With inflation actually dipping into negative territory for the first time in nine months, bets on an RBNZ rate hike will have been pushed back considerably, possibly to next year. The kiwi has done well amid euro-weakness of late, so it is understandable that will the euro strengthening some of these kiwi gains have been reversed. This pair is trading up above 1.93.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling is recovering against the loonie, with Canadian inflation likely to weigh on the loonie today. US manufacturing data was poor yesterday, though US stocks spent their third consecutive session in the green. Still, the domestic picture could weigh on the Canadian dollar today with inflation likely to ease and push a Bank of Canada interest rate hike even further into the future. This pair is trading back up at 1.57 and sterling should be able to continue climbing against the loonie today, though it remains at the very bottom of its long-term trading range.	FORECAST
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