Foreign Exchange News
21 June 2013

Eurozone Remains Fragile As Markets Absorb FOMC

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EUR/USD 1.3218
GBP/USD 1.5482
GBP/EUR 1.1712 (0.8538)
EUR/CHF 1.2275
GBP/CHF 1.4375
GBP/AUD 1.6781

Yesterday the markets took stock of the FOMC and Bernankes comments as two schools of thought emerged. Some feel that Bernankes comments indicate the Fed will be looking to taper their QE activity as early as September, others have taken stock of his comments and realise that any tapering will only occur should the US continue to hit growth and unemployment targets.

Data released yesterday showed two sides of the US economy. Weekly jobs figures were worse than expected, leading indicators missed their mark by .1%, the Philly Fed confidence survey posted 12.5 versus -2.0 expected whist existing home sales grew by 4.2% versus .6% expected. This huge increase in home sales was not enough to allow the greenback to continue its rally as it gave back some ground to the EUR, whilst the pound rallied back above 1.5500 overnight against the buck, although it failed to hold above that level. The reality is that US data will have to show more positive results if the Fed are to continue with an early exit plan.

Data released from the Eurozone painted two very different pictures for the region, PMI data proved encouraging, one of the leading proxy’s for GDP advanced to its highest levels since Mach 2012 with the composite figure posting 48.9 versus 48.1 expected with both the manufacturing and services data beating their estimates. That being said the reading was still below the 50.0 level thus indicating contraction, albeit at a slower pace.

Consumer confidence also reached a 22 month high but growth figures will mean little for the Eurozone if the financial crisis returns. Concerns about Greece have once again reared their head as reports suggested the IMF may remove support for the ailing island if they do not enforce austerity measures to plug their shortfall. Greece remains a fragile point for the Eurozone and a breakdown in the coalition, could prove detrimental for risk appetite and the regions hopes for recovery.

The UK continues to show signs of improvement and we see some upside potential for the pound as it may benefit from a somewhat regional safe haven against a potentially fragile euro. Retail sales showed signs of improvement in the high street despite the coldest May since 1996. Political debate continues around austerity measure in the UK and next Wednesday’s spending review may address some of these concerns. Regular readers will know we are awaiting to see incoming BOE governor Carney’s stance on potential easing measures but there is growing upside potential for the pound.

Data today is light, the ECB will release details of early LTRO repayments which represent contraction of the ECB balance sheet. EU finance ministers also meet in Luxembourg and we will be keeping a close eye on headlines from that meeting.

EURGBP broke back below .8550 yesterday following the stronger retail sales. The recent range remains in play between .8600 and .8475, we favour a test back towards .8500. EURUSD gained some ground yesterday although downside potential to 1.3100 remains, moves to the topside should remain capped at 1.3300. GBPUSD is supported below at 1.5420, although we’d like to see this hold above 1.5500 to resume its run higher towards 1.5580.

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