GBP/EUR 1.1711 (0.8575)
The big event yesterday was of course the FOMC. The USD rallied strongly following the fed announcement that they are beginning to lay the groundwork for change. Whilst the Fed do not appear to be in any hurry to exit the current QE policy (purchasing $85bln in assets per month), should economic conditions continue to improve (as expected) then they will look to start to reduce the amount of monthly purchases.
This is not fresh news and has always been expected, but the clarification from Bernanke that they will look to reduce purchases later in the year with a complete halt in mid 2014, when they expect unemployment to drop to 7.0%. Forecasts from the Fed also suggest that they expect to see interest rates rise earlier than expected, with the first hike now coming earlier in 2015 than initially forecast. US economic data will be key to this exit strategy with particular attention to both growth statistics and Jobs data.
The BOE minutes yesterday offered us nothing new, voting was 9-0 to keep rates at .5% and voting remained at 6-3 in favour of keeping asset purchases on hold. If anything this was slightly negative for the pound as expectations were for a more hawkish BOE following a strong Q1 and improving data throughout Q2. This was the last MPC meeting for Mervin King and he has been one of the voters in favour of additional asset purchases, we will await the July meeting to see what stance Carney takes in this debate, he has been a vocal supporter of QE style, however recent data may see him adopt a different approach to spur on growth in the UK.
There was very little from the Eurozone yesterday as it played second fiddle to bigger data releases. The IMF published its annual report on Spain and also a review of the Irish bailout program. The report pointed to several areas where Spain have not implemented the program satisfactorily and other areas that are already on the Spanish agenda for improvement. The Irish situation also has its concerns according to the IMF as they question the sustainability of the recovery and the debt burden.
Last night’s FOMC announcement saw GBPUSD drop from 1.5650 to lows of 1.5428, level around where we are currently sitting. This drop supports our view of a stronger USD into the end of summer providing US data performs as expected. Resistance to the topside comes in at 1.5580 and 1.5470 with support below at 1.5382.
EURUSD fell from three month highs as the USD rallied, the drop from 1.3400 halted at 1.3228 before breaking back below that support this morning, our next target level down is 1.3114. EURGBP maintains its range, moves to the topside falling well short of string .8600 resistance with support below at .8555 and lower at .8475.
We have seen a lot of our client use recent highs in GBPUSD and EURUSD to buy their USD requirements with hedges put in place out 12-18 months, with USD set to rally into the year end we’d expect to see more look to cover their USD purchase exposures.