Foreign Exchange News
21 January 2014

Eurozone Complacency High: is the Euro Overvalued?

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EUR/USD 1.3538
GBP/USD 1.6416
GBP/EUR 1.2127 (0.8245)
EUR/CHF 1.2356
GBP/CHF 1.4985
GBP/AUD 1.8691

With US banks closed yesterday due to Martin Luther King Day, focus was on the European session to see if we could see a continuation of last week’s risk trends, however with little relevant data on the European docket and continued uncertainty in markets, major FX pairs appeared happy to remain in consolidative ranges. In fact EURUSD and GBPUSD held 45 pip ranges whilst EURGBP maintained a 25 pip range.

The USD index, which measures the USD against a basket of currencies has also been trading in a tight range between key technical levels and as such would indicate a potential breakout risk on USD pairs. Activity and volume is expected to return to markets today, however we may have to wait until Thursday before we get any decent economic news flow from the US, earning season has the potential to drive risk trends, and as such the USD.

We mentioned yesterday a certain complacency and goodwill priced into European periphery bonds and to put this in context we took a look and where some of these were trading. As mentioned yesterday Irish, Spanish and Italian yields are showing improvements but taking a look at Ireland; Ireland, now rated the same as Romania, pays the same 5 year yield as US treasuries and lower than AAA rated Norway.

We agree the worst may be over for the Eurozone but the path to recovery is bound to be long and drawn out, and we are confident there will be bumps along the way. Does this just mean the market is naive to these risks, or is it simply investors looking for higher yields away from near zero rates? Either way it leaves the single currency vulnerable to position unwinds in our eyes.

Despite the return of US banks today the data calendar remains sparse and focus will be on this morning’s ZEW releases for German and Eurozone economic sentiment. The German figure is expected to show 64.0 vs 62 in December bringing it to an 8 year high. Yet again this is at odds with German performance, as GDP was only .4% vs .5% expected for 2013. If anything the improved sentiment likely reflects hopes for further easing – not exactly the best news for the single currency – any boost may only be temporary should the figure come in as expected.

As always we are happy to discuss other currency pairs however with over 75% or our client trade coming via EURUSD, GBPUSD and EURGBP we focus on these pairs. Should you have any requests please feel free to let the dealing desk know and we’ll be happy to provide updates.

EURGBP is sitting just above annual lows and testing down trend support, a break below this support, around .8220/25, will likely open up a swift move back towards .8085. Resistance to the topside comes is around the 50 day moving average and January highs between .8339 and .8350.

EURUSD has remained below 1.3600 thus far this week but failing to break back below December lows around 1.3520. We need to see this level broken for a move towards 1.3450 with stronger support ahead of 1.3300. A positive ZEW will likely see a relief rally back towards 1.3600, however January highs of 1.3700 should cap any further move.

GBPUSD has essentially maintained a 1.6300 to 1.6600 range since early December, and aside from a couple of breaks below to the downside that didn’t follow through, the 1.6300 level has been firm support. We are currently sitting mid range and unlikely to see any breakout ahead of the BOE minutes tomorrow, which may well set the stall out for the pound going forward.

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