Meryvn talks, Sterling tumbles

andres del risco

Meryvn talks, Sterling tumbles. The BoE cut its growth forecast from 1.2% to 0.8% citing the on-going debt crisis as the biggest threat to the recovery of the UK. Mervyn King said the Eurozone is “tearing itself apart without any obvious solution”. My elderly next door neighbour could have told us that. This isn’t the only reason that the UK economy won’t return to pre financial levels before 2014 as inflation won’t come under the target rate of 2% for around a year (looks like yet another letter will need to be written from Mervyn King to George Osborne) we have volatile commodity and energy costs and the squeeze on household earnings continues for the majority. On the topic of ‘QE’ he added that no decision had been taken on whether to pump more money into the economy. He’s left the door ajar for a further round of stimulus in the coming months however inflationary pressures will dictate this. The BoE confirmed they are making contingency plans for the breakup of the Eurozone. Hmm, I’m not quite sure you can plan for the unknown but there we go.

As I’ve said for a while we (the UK) have problems, not on the scale of the Eurozone, however I’ve been of the opinion that GBP has been too high against the USD in particular. My target rate of 1.58 looks like coming into play over the next week. If you’re a seller of USD and buyer of the pound put an order to execute at 1.58 the figure and we’ll secure that for you whether that be in the UK, US or Asian tradingsession. GBP/USD lost around 100 pips during the release of the Bank of England Quarterly Inflation Report with Cable falling from around the 1.60 level to sit just above 1.59. We’ve since breached the 1.59 figure and I expect downward pressure to continue on the pair.

EUR/USD? Since the start of May the cross has lost 5 cents. Will the downtrend continue? Yup. There’ll be upticks on an intraday basis however I see the pair attempting to break the 1.2681 level again with a push lower to 1.2625 (Jan low). If we break this level then the psychological 1.25 figure comes into play. I don’t think we’ll see as fast a move as we have from the 1.30 level down however I expect us to be trading around the 1.25 level by end of month.

We’ve had Spanish GDP out this morning with the Spanish economy posting its second consecutive contraction. GDP dropped 0.3% QoQ April and 0.4% YoY. News from Europe is driving the market so any news out is going to impact EUR crosses. The ECB president, Mario Draghi, conceded for the first time yesterday that Greece could leave the monetary union. Speaking in Frankfurt he said that the European Central Bank will stop lending to some Greek banks to limit their risk. Doesn’t inspire much confidence does it? They’ve shifted the responsibility for lending to Greek financial institutions onto the Greek Central Bank. Three months ago no-one thought Greece would be allowed to leave the union. An exit now seems to be the commonly held view and most likely scenario. All this adds to the uncertainty and I see this continuing to dampen the outlook for the EUR hence my call of EUR/USD down. Greek savers have withdrawn around 1 Billion Euro’s from the
Banks in recent days fuelling fears that they don’t think their funds are safe. All adds to the chaos and I think you’ll see further deposits withdrawn from your average Greek in the coming weeks. I think you’ll see investors favouring the more defensive currencies such as the yen and dollar in upcoming trading sessions.

GBP/EUR? It’s taken a bit of a hit after Meryvn King gave the pound a kicking yesterday. We’re back under the 1.25 level. Look to work market orders around the figure today and take advantage of any weakness in the single currency. We may be rather flat in the European session today with trading likely to be range bound due to European holidays such as Germany’s Ascension day. There isn’t much in the way of data out of the US today either so don’t expect any sharp moves as we’ve had in the past few days.

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