SINGLE CURRENCY ON THE RACK BUT STERLING FEELS SHORT-TERM PAIN

In a week that many expected to be a foul one for Sterling, with the Consumer Price Index due to join Bank Of England MPC minutes in further strengthening the case for heavy continued monetary and fiscal easing, undermining the yield appeal and future real value of Sterling, the currency has not actually fared too badly thus far. Most of this, with GBP/EUR in mind, has been thanks to a huge deterioration in sentiment on the Eurozone, although GBP/USD has smarted hard from risk negativity bolstering the Dollar.

Volatility has certainly been the name of the game for GBP/EUR over the last couple of days, the result of which has been little overall concerted movement. Extreme concern over Eastern European Banks, most of which are owned by Western European Banks, combined with rocketing bond spreads for other smaller Eurozone states has put some heavy pressure on the single currency, giving Sterling some good support against it. Furthermore, on the UK side, a higher than expected Consumer Price Index figure at 3 percent year-on-year for January, reported for the UK yesterday alongside 0.1% growth in the Retail Price Index, has also been beneficial for the GBP/EUR case. This data, which essentially indicates that prices are not dropping as far and as fast as many economists have expected over the last few months, although it does little in the medium and longer term outlook for UK interest rate curves, will certainly take the sting out of quantitative easing talk, which has reached a real crescendo over the last weeks.

Despite the above, Sterling still looks set to take a hammering today ahead of minutes from the Bank of England’s February meeting. Although there will certainly be nothing new in the minutes, which will only confirm that all Members are unanimous in a decision to keep base rate relatively stable whilst enacting incremental degrees of asset buying to try and elevate general market prices, the market’s focus on them will undoubtedly lead many to abandon long positions in the currency on the very short-term just in case of any surprises. Expect GBP/EUR to move down towards the 1.1150 level over the course of the day with GBP/USD also looking vulnerable at 1.41 as the Dollar is bought against most major currencies.


Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx


This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

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