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Wednesday, November 10, 2010 - Currency Market Analysis - Cable Outperforms while Euro Struggles Overnight

Cable Outperforms while Euro Struggles Overnight

The Great British Pound was well supported overnight by more hawkish than expected comments from the Bank of England. BoE Governor Mervyn King surprised markets at his Inflation Report news conference, in which he highlighted the view that while risks exist, the recovery in the United Kingdom is likely to continue; he went on to predict a CPI of 1.6% in two years. He highlighted that for the time being downside risks, which were mostly external, are mostly balanced with the upside possibilities as increases in manufacturing output and the services sector propel the economy. Traders took this to mean that the BoE would not be expanding their asset purchasing program for the time being.

The mostly external downside risk King was alluding to was Europe, and that “Over 60 percent of [England’s] exports go to a part of the world that isn’t exhibiting particularly buoyant growth and clearly has quite significant challenges within the area in terms of sovereign debt problems”. These comments brought the common currency under pressure against the Cable, and helped push the EURGBP under the 50-day moving average at the 0.8600 figure, a level not seen since late September. At the time of writing, the pair has run into congestion in the upper 0.8500 region from the 200-day moving average and a 50% fib retracement of the August-to-October rally. Given the fundamental story in the Euro, more downside risks in this pair exist.

The Euro was also heavy against the Big Dollar overnight, dragged lower by cross-selling against the Cable, a Portuguese bond auction which saw the cost of capital to the embattled nation rise dramatically, and the gap between Irish & German benchmark bonds trading at a lifetime high. The EURUSD has been in a freefall since last week, dropping over 5 big figures from its 9-month high near the 1.4300 level. It seems now that QE2 in the United States has been announced and the uncertainty over, investors have once again turned their heads to Europe. Going forward, the potential for further losses in the Euro is likely to be tempered by the risks associated with an increase in the supply of dollars as a function of QE2 weighting on the Greenback.

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