STERLING REVVING QUIETLY WITH USD DOMINATING FLOOR

Hair-raising volatility has had everyone shivering over Sterling FX pairs this week.  Opposing market forces and opinions on value growth have been rocking EUR/USD and major USD pairs day-in day-out and the corresponding ructions have done little to aid the highly fragile outlook for the UK economy going forward into a new decade.  As we mentioned earlier in the week, the Bank of England Monetary Policy Committee meeting of yesterday was bound to be bland and porridge-like in consistency, as such doing little to commit traders to any major positions in the run-up, leaving the Pound jumpy.  They didn’t disappoint either and GBP/EUR has traded in a narrow 1.10-1.11 range for most of the week as a result.  GBP/USD on the other hand has seen more price movement, though little trajectory, thanks to some pretty big USD/JPY and EUR/USD swing over the last few days.  The pair dipped heavily into the low 1.59 region in the build-up to the BOE yesterday but has since recovering with little tangible data to hold the price down.

EUR/USD continues to be a big question that has potential sharp ramifications for Sterling going forward into the year.  The pair continues to be fixed in a face-off between fundamental Dollar bulls and risk-running emerging market players this month, routing cash through the EUR into Asia stocks and fixed income.  The fact that the two investment plays are both so strong in gravity at present firmly explains the fact that EUR/USD has barely touched out of a 200 pip movement so far this year.  We are calling for a big release of the pressure build up very soon though with US Non-Farm Payrolls today likely to provide a catalyst.  A good figure for the region (i.e. a positive figure for December – anything above 20k) should propel the USD with GBP/USD likely to take a spank as a result for the 1.58-1.59.  A negative figure (anything minus or under 20k plus) will however call of the USD bulls for the month and likely give GBP/USD some support for the 1.62.

We are looking for GBP/EUR to continue to test upside regardless of today’s NFP outcome for the US.  Speculation currently thrumming through markets is that the BOE will announce at their February meeting that Quantitative Easing will be closed off for the year as soon as possible, which would have a very positive effect on Sterling (especially against the EUR).  Continued fear over the fiscal and monetary ramifications of Greece’s Balance Sheet is also dogging the EUR and could, especially is the Dollar continues to gather favour this year, add hugely to upside potential for GBP/EUR.  Watch markets today for game-changing plays.