Recent sterling strength to be tested

February 18, 2015

Currency markets have been placid so far this week, in particular the euro which has been taking the negotiations between Greece and Germany in its stride. It’s been a far cry from a couple of years ago when volatility was much higher during the debt right down agreements, but the risks remain the same of a possible Grexit. Perhaps investors are getting a little complacent as today will not only see negotiations continue, but the ECB is due to make a key decision about Greece’s access to emergency funding. A couple of weeks ago they stopped accepting Greek collateral in exchange for the ECB’s low rate financing, but now the ECB could pull the plug on that emergency funding altogether which would come as a hammer blow for Greece ahead of the current bailout’s deadline. This said EURUSD continues to hover around 1.1400 as investors expect an extension to be agreed imminently and therefore the ECB should keep the window open.

There are other things to focus on today, not least the Bank of England minutes, but at the same time UK unemployment data. This is expected to show unemployment remain at 5.8% and average earnings to grow 1.8%. This key figure could determine whether GBPUSD, which has recently broken out of its medium term downward trend, will carry on higher. Yesterday’s inflation figure fell to its lowest on record but the core number actually increased, so headlines may point to rising real incomes, however the reality is a little different and this is what continues to give the BOE its headache. For GBPUSD to maintain this move to the upside we’ll have to see some strong figures this morning.

Finally we must not ignore the FOMC minutes tonight which will be closely watched to see how the recent dollar strength and fall in energy prices has impacted their thoughts on when the first rate hike from the Federal Reserve will come.

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