Foreign Exchange News
24 January 2014

GBP/USD Reaches 3 Year Highs

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EUR/USD 1.3671
GBP/USD 1.6625
GBP/EUR 1.2162 (0.8222)
EUR/CHF 1.2280
GBP/CHF 1.4937
GBP/AUD 1.9140

The data calendar is light today but two dominant themes carry over from yesterday, USD is weaker against EUR and GBP, although stronger versus EM currencies, and US equity markets fell once more, with the Dow tumbling to 1 month lows with the negative sentiment carrying over into the overnight Asian session.

It is difficult not to feel like you are banging your head against a brick wall when highlighting potential EUR weakness when EURUSD continues to trade firmly, however you just have to look at the advance in GBP versus the single currency to see where faith in real economic growth lies. The Euro seems to absorb negative news and rally on anything positive and yesterday’s PMI data was just that. The Eurozone composite figure beat expectations posting 53.2 vs 52.5 expected, lifted by an out-performance in German manufacturing.

There are a number of rationales behind EUR strength, low interest rates with higher yielding government debt supported by a central bank promising to support the single currency. There is also the debate that the EUR is becoming a safe haven. The euro is the second most liquid currency in the world and yesterday we saw some typical risk off moves. Stocks were lower, the JPY (another known safe haven) rallied but the USD lost ground against the single currency. This may well continue until the uncertainties surrounding the pace of US taper dissipate although we don’t expect the Euro to remain an attractive haven for long as peripheral yields tighten and it becomes evident of how long the path to recovery will be.

The pound also took gains versus the USD, breaking and holding above the 1.6600 level, reaching fresh annual highs this morning above 1.6650, although we have since fallen back from these levels. The pace of UK growth, most notably in jobs has been more than impressive and has blown economist predictions out of the water. This in turn has seen interest rate expectations move from 2016 to Q4 2014. There’re maybe some concerns in the manner the economy has grown.

The savings rate has dropped, wages are growing significantly less than inflation, services are strong but the high GBP rate will be impacting exports and there are major concerns of a bubble economy whilst UK economic imbalances remain. GBPUSD is showing over bought signals in daily, weekly, and monthly time frames and while there is still the prospect of reaching 2011 highs just short of 1.6750 there will be significant sell interest at those levels. February will bring us the UK inflation report and hopefully further indication on the BOE’s interest rate outlook. For now they see no reason to raise rates.

The data calendar is light today so we look for some consolidation in recent ranges into the weekend. The world economic Forum continues in Davos so weekend headlines from this may provide some indication towards Monday’s opening.

Have a good weekend.

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