Currency - GBP / Euro

The week began with many commentators actively discussing whether or not the Euro was in it’s death throws. Fear and greed are the usual drivers of the markets and fear has dominated the agenda over the last couple of weeks. Investors were concerned with growth prospects in the US and of a sovereign debt crisis in Italy or Spain. Bond yields in Italy and Spain rose to well above the 6% level which is thought to be unsustainable over the long term for government financing and raised fears that they too would require a bail out as well as Greece, Ireland and Portugal. Thankfully the ECB finally managed to reach a consensus and stepped in to purchase Italian and Spanish bonds providing the market with the liquidity it needed. Unfortunately the relief was short lived and attention swiftly turned to France , the Eurozones second largest economy. Rumours of a French downgrade swept the market and as the loss of it’s AAA rating would have huge global implications and certainly affect Frances ability to borrow the money it needs to lend to countries in the bailout programme. Stock markets were hit hard, particularly financial stocks with one French bank Societe Generale falling by as much as 23% in one day!
As I write this policy makers are announcing plans to ban short selling of financial stocks in response to the sharp share price falls this week. I’m not sure if this will have the desired effect as it sends a terrible signal that perhaps some institutions are fundamentally weak.
Sterling was by no means isolated from events in the Eurozone with investors realising that the EU is our main trading partner and a slowdown in Europe would have negative implications for the UK. Further evidence of that was shown in the poor manufacturing data for June which fell 0.4% compared to May . The BOE inflation report on Wednesday was naturally downbeat with growth forecasts being slashed by Governer Mervyn King and further QE not being ruled out.
There are clearly divisions within the Eurozone as to how to approach the crisis and investors are picking up on this indecision as they need policy makers to provide clarity and leadership. None of this has been evident particularly as most of the decision makers have been away on holiday. Next week brings a mass off UK centric macro data beginning on Tuesday with inflation figures for July which will be closely watched. As will the minutes from the most recent MPC meeting due on Wednesday. Expect markets to remain nervous as stock markets provide clues for future direction.
The Gbp-Eur range has been relatively tight . The market does seem to have found a base at 1.1000 and we are in a tentative uptrend which began at the beginning of July. 1.1300 should provide near term support and euro sellers should target no lower than that level. Only a sustained break below the Fibonacci level at 1.1240 would cause me to worry.
There are a few levels of resistance on the upside but if we can close above the Fibonacci level at 1.1472 the next target would be the 1.1568 August 4th High. Euro buyers should consider reducing part of their exposure there in case the current range holds.