Forex markets: Sterling tracked the euro and also rose against the dollar, from GBP/USD 1.57 to 1.59

Greek deadlock still unresolved, but the euro rose and could strengthen further in the event of a positive outcome. The BoE has expanded the APF and Wednesday’s Inflation Report will contain the new growth and inflation projections. ..  

          The latter should create the conditions for a correction of the pound on a 1m-3m horizon. The yen proved sensitive to the evolution of market sentiment: downside reversal already under way… as long as the Greek crisis is solved. 

          The Swedish central bank will meet on Wednesday: underperformance of the Swedish krona against the Norwegian krone, with or without a rate cut. The Reserve Bank of Australia surprised the markets by leaving rates unchanged: AUD stronger, but risks persist.

          EUR – The euro gradually appreciated this week, in step with progress towards a deal on Greece being struck. The exchange rate rose from EUR/USD 1.30 to 1.33. It stopped at the latter level, however, when the Eurogroup decided to postpone a final decision until next Wednesday, following parliamentary approval by Sunday of the Greek government’s proposal. The euro dropped somewhat on the postponement, retracing to 1.32. If a (positive) solution is reached by the end of next week, there could be room for a further strengthening towards 1.34-1.35. Resistances at 1.3322 – 1.3354 – 1.3386 – 1.3434 – 1.3487 – 1.3521 – 1.3548. Technically, upside should remain restricted to within the EUR/USD 1.34 area, but as the Greek deadlock isproving more complex than expected, any upside reaction of the exchange rate might prove sharper. The ECB has left rates unchanged and may not cut them any further. This could appear to be a supportive factor for the euro, but – barring positive surprises on the growth front – will not shield the single currency from the risk of a pullback to (just) below 1.30. If the Greek crisis becomes more complex, rather than reaching a solution, the euro would risk shedding this week’s gains, returning to 1.30 or just under (key support at 1.3026).

          GBP – Sterling tracked the euro and also rose against the dollar, from GBP/USD 1.57 to 1.59. However, the UK economy provided no grounds on which to prospect a further strengthening of the pound against the dollar. In fact, the BoE sent signals pointing to an at least temporary correction. As expected, the la Bank of England left the bank rate unchanged at 0.50% and expanded the APF by GBP 50Bn. In its press release the BoE forecasts that based on its new projections (to be published in the inflation report next Wednesday, 15 February) growth should prove weak in the short term, and strengthen gradually in the course of the year. The strengthening will be guided by (1) monetary stimulus currently in place, and (2) a slight recovery in real household incomes, thanks to the expected drop in inflation. However, the risks to growth are skewed on the downside, due to (1) restrictive credit conditions, (2) the fiscal consolidation under way, and (3) the problems afflicting the euro area. Inflation is expected to drop sharply in the short term, and to continue declining subsequently – also in light of still rather high levels of spare capacity. Next week’s inflation report will shed light on whether there is a margin for a further expansion of the APF in the months ahead. In our opinion the BoE’s statement has created the conditions for a short correction phase for the GBP/USD exchange rate on a 1m-3m horizon, with a return towards the GBP/USD1.55-1.50 range.

          JPY – The yen unexpectedly showed sensitivity to easing risk aversion, in step with the progress made in Greece towards the achievement of a deal. It then weakened somewhat, from USD/JPY 76 to 77. A positive outcome of the Greek deadlock would allow a further brightening of market sentiment and – in that case – the decline of the yen, for all its moderate entity, may represent the start of the long-awaited downside reversal.

          AUD – Contrary to consensus expectations for a cut, the Reserve Bank of Australia left rates unchanged at 4.25% on Tuesday. The initial reaction of the AUD was a strengthening (against the US dollar). The exchange rate rose from 1.06 to 1.08 AUD/USD. However, it failed to rise above that level. A historical high was reached in the AUD/USD 1.10 area in July 2011. Therefore, some saturation is observed near those levels. The RBA made it understood that the decision was prompted by a slight improvement of the overall scenario, both at the domestic and, most importantly, global levels. However, it explicitly said that in light of the favourable inflation scenario, it is ready to cut rates again if demand conditions show signs of weakness. As a result, we confirm our expectation for a weakening of the AUD this year, acknowledging however the existence of upside risks to our scenario (i.e. central projections for the AUD/USD exchange rate may be somewhat undervalued).

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