Eurozone uncertainty thwarts gains in currency

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Sterling came under pressure this week following news that inflation posted flat year-over-year in February, the worst result on record. Driven by sliding oil prices, the Consumer Price Index (CPI) in the UK has flat lined as food and motor costs contracted. The CPI number helped reinforce the idea that interest rates in the Britain will remain low and has put the British Pound on the defensive.

GBPUSD had been flirting with 1.5000 this week, but as trading winds down the pair has been turned back. 1.5000 is a key psychological level and so long as rates remain below it, the overall outlook for the pair will point lower.

Turning to the common currency, after consistent declines over recent weeks, EURUSD bounced off of 1.05 and has made a run at 1.1000 this week. So far however a lingering hesitation about economic and political factors in the Eurozone have thwarted any further gains. In light of the recent dovish turn in American interest rate guidance, the slide in this pair has temporarily stabilized. It seem that a consolidation range of 1.05 to 1.10 is forming as markets wait for more data. Key factors to be aware of include Greece, the impact of QE on Eurozone inflation, and American interest rate liftoff as well as trajectory.

With Sterling on its back foot and the Euro retaking prior losses this week, GBPEUR has plunged lower. The pair has tumbled about 7 figures from the 8-year high established only a couple of weeks ago. Given the pending UK general election, the move suggests that markets are putting the long term up-trend on hold until election related uncertainty has passed.

It’s a 4-day market week in most of financial markets next week due to the Easter holiday. However there is by no means less tradable events during said condensed week as the classic beginning of the month economic releases make for a loaded calendar. An assortment of Eurozone CPI data points on Monday and Tuesday will give currency markets plenty to chew on at the beginning of the week. The headline Eurozone CPI number slipped into negative territory at the beginning of 2015, suggesting that lower oil prices have in fact pushed the Eurozone into a deflationary position. This was largely expected by financial markets, and led to the European Central Bank to drastically expand it QE program. Observers will be keen to see whether the fresh stimulus is achieving its objective of stabilizing prices growth; evidence to the contrary is unlikely to be received well by the Euro.

Two-thirds of the UK PMI series (Manufacturing and Construction sectors) will also be published next week. The all-important Services sector number being pushed to the following week by the Easter holiday. Worth special attention is the manufacturing sector outcome, as lower oil prices and declining Sterling rates are both beneficial for expansion in that part of the economy. The UK also gets Q4 2014 Trade Balance data next week. This data is a lagging indicator and is unlikely to have much of a long term impact on Sterling. However in light of recent declining Sterling rates, in coming quarters it will be interesting to see if growth in British exports helps trim Britain’s traditional Current Account deficit.

Wrapping up the trading week, or kicking off the long weekend depending on where you are sitting as you read this, American employment statistics will be announced in next Friday. The Non-Farms Payroll component of American labour data in particular tends to generate excess volatility, even when markets are trading with full liquidity. As such traditional volatility could be amplified by thin holiday volumes this time around. This presents a great opportunity for market orders. Speak to your Cambridge representative this week to discuss how an order may work for you.

Public Service Announcement for our UK and mainland Europe based Readers: Don’t forget Daylight Savings is this weekend.

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Week to Date

GBPUSD
-0.41%

EURUSD
+0.43%

GBPEUR
-0.84%

Oil (Brent)
+4.72%

Gold
+1.29%

FTSE
-2.29%
Week Ahead

MON 30
EUR: German Preliminary CPI

EUR: Spanish Flash CPI
TUE 31
GBP: Current Account

EUR: EZ Flash CPI

ALL: G7 Meetings
WED 01
GBP: Manufacturing PMI

USD: ADP Non-Farm Estimate

USD: Manufacturing PMI

THU 02
GBP: Construction PMI

USD: Trade Balance

FRI 03
GBP: Bank Holiday

EUR: Bank Holiday

USD: Non-Farm Payrolls

USD: Unemployment Rate

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About Author

David Starkey is a currency options dealer and market analyst for Cambridge Mercantile Group. A fascination with the everyday impact of globalization on society led David to pursue a degree in International Business from the University of Victoria. From there Forex was a natural fit. He has worked as a currency trader, risk manager, and hedging expert in both Canada as well as the United States for several non-bank brokers. Cambridge Mercantile Group.

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