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Forex: Sterling risks

We start what is the last full trading week of the first half of 2014. This was the year that was meant to be the dollar’s, as the Fed started tapering and the ECB eased rates further, but it has not quite worked out that way. Back in December, the Bloomberg survey of banks and other institutions saw a median expectation of 1.30 for EURUSD at the end of June. Our outlook was relatively bullish at 1.38.  The weaker than expected economy in the first quarter goes a fair way to explaining the dollar weakness that prevailed, but this is not the whole story.  The euro’s continued resilience, together with the fact that QE is having a reduced impact on currencies in general has also played a part.

For this week, the focus remains with sterling, after cable’s push above the 2009 highs of 1.7043 last week (high of 1.7063 recorded last week).  Members of the BoE’s policy committee are testifying before parliament tomorrow, which will be an interesting event given the recent shift in tone towards the possibility of higher rates this year. Also, the results of last week’s financial policy committee will be published Thursday, where there is a strong expectation that we may see some measures from the Bank to dampen the housing market.  Restrictions on lending ratios and more stringent tests on mortgage availability are some of the measures being floated.  This could have a dampening impact on the currency, should the belief prevail that this reduces the need for higher rates, but note that Carney was keen earlier this month to suggest that such measures were not a substitute for higher rates.  Note that EURGBP has been holding steadier below the 0.80 level recently, as the euro weakness from the ECB meeting earlier in the month has not seen substantial follow through.

 

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