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A Rocky Road Lies Ahead For Stg in Q2 2014!

Looking back at my post of January 8th this year – Where will Stg trade in Q1 2014? My first thoughts are I could repost my conclusions and they would be equally valid for Q2 2014. However back then I was talking for the most part about Stg strength, a series of strong data releases over the autumn months had convinced me that Stg would eventually test .8000 against the Euro. I did highlight the very strong support for the Euro at the .8150/60 level and as it transpires .8160 was the low posted in Q1. .8400 was the high which is close to the strong resistance level at .8420 that I also mentioned in the article. I must confess that I failed to foresee the low level of volatility for Stg over the quarter and it never reached .8550, a level I thought it might have briefly tested during the first three months of the year.

EUR/GBP Performance Year to Date (Source: Bloomberg)

EUR/GBP Performance Year to Date (Source: Bloomberg)

The data

While UK economic data for the quarter has in general been strong, forward looking indicators such as the PMIs have slowed from the lofty levels of Q3 2013. Recent data has also indicated some (welcome) slowing in the housing sector. Inflation data has also surprised to the downside while the most recent unemployment data shows the number of unemployed remaining at 7.2%.

This is all welcome news for the Bank of England who have managed to extricate themselves from the hook of a single forward guidance indicator (unemployment level) by now referencing a number of different indicators that need to be aligned before they need to contemplate raising interest rates.

This ‘’flexibility’’ coupled with slightly disappointing (only because the Market’s expectations were no longer grounded in reality) economic data releases have taken some of the bullishness away from Stg.

So why are we not testing .8500? Euro weakness is the reason. This weakness stems from weak inflation data from the Euro Zone. This has raised expectations that the ECB will be forced to act sooner rather than later to stimulate the moribund Euro economy, they are likely to have to resort to quantative easing (QE) and the Market believes this should lead to a weaker Euro. If the April inflation release continues to show inflation weakening across the Euro zone, the ECB could be forced to lower rates or employ QE as early as their next meeting.

Implications for Stg

Such an easing by the ECB may provide sellers of Stg an opportunity to sell their pounds close to the strong .8150/60 support level. I think this support level may well hold over the course of Q2, I would expect to see a bounce from there l that takes us back up to .8400/20 resistance and ultimately to a test of .8500. While I expect choppy range trading to continue over the quarter, my view has shifted from buying Stg on the dips to selling it on the rallies.

These are my thoughts on Eur/Stg in Q2 2014, I would love to hear yours. Please use the comment box below to express your views on the currency.

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2 Responses to A Rocky Road Lies Ahead For Stg in Q2 2014!

  1. JohnC April 8, 2014 at 6:19 pm #

    Hi Eamonn,
    Given we are heading towards .80, why have you changed your view to selling the £. Are you wary of ECB intervention if we headed towards .75 ?
    John

    • oconnore April 9, 2014 at 3:23 pm #

      John, sorry for not getting back to you before now. I think in H2 2013 we were dealing with stg strength resulting from economic outperformance, the economic releases consistently ”beat the street”. However of late these releases (though still strong) are failing to beat expectations. Stg no longer tends to rise on good numbers only on exceptional numbers. On the other side because of the fear of deflation I expect the ECB to ease monetary policy, this I think will see a ”sell Eur” knee jerk reaction, I don’t think the Eur weakness will be sustained. I think Stg longs should take advantage of this Eur weakness to sell Stg at either the .8160 level or if they are optimistic at the .8000 level. I am sceptical that the ECB would intervene in the FX markets and I am very sure they would not do so to stop the Eur weakening to .7500

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