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Forex: Sterling strength

Sterling was the big mover overnight as the Bank of England Governor gave a strong hint that rates may rise this year. In his keynote Mansion House speech, he noted that the decision on interest rates was becoming more finely balanced and that it could happen “earlier than markets currently expect”.  I’ve been seeing this as likely for some time now and the Governor’s remarks could well be a pre-cursor to at least one member of the MPC voting for higher rates when the minutes to the June meeting are released next week.  To a fair degree the view hinges on moving earlier so as to avoid a more rapid rise in interest rates at a later date and to avoid greater financial risks and instability from keeping rates near zero for too long.

Sterling was up more than 1 big figure on cable on the news, with a high of 1.6972.  The more interesting potential is on EURGBP, with a move below 0.8000 seen on the back of last night’s speech.  We are now at levels last seen November 2012.  What matters most for FX is policy divergence.  We saw it last year most strongly on AUDNZD so EURGBP could well be the focus for macro players during the second half of 2014. That said, the EURGBP downtrend has been established since April so whilst there is likely more to run, a fair deal has already been priced in.

For today, data releases in the form of eurozone unemployment and US Michigan confidence are unlikely to be major risk events for currencies which should be relatively constrained, bar the usual weekend positioning. The yen was slightly weaker on the back of the BoJ meeting results, although there were no major shifts in the accompanying statement.

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