Having dropped as low as €1.1530 at the end of January, the pound has enjoyed a strong resurgence this week following some upbeat UK figures. The triple whammy of the three leading industries – manufacturing, construction and services – all came in significantly above forecast, raising the prospects for a strong opening quarter - further discrediting the catastrophic fourth quarter GDP estimates, which showed the UK economy in contraction.
Sterling has been given an additional leg-up from some long overdue euro weakness. In a press conference earlier today, European Central Bank President, Jean-Claude Trichet played down the risk of eurozone inflation stating that inflation risks are “broadly balanced” – a rather beige phrase which more or less summed up the press conference. The market had been pricing in a “ratcheting up” of hawkishness – this damp squib of a comment then more than dampened recent speculation about an interest rate rise which I alluded to in my blog post only yesterday.
More often than not, higher interest rates boost the appeal of a currency so with Trichet stemming that prospect the euro has lost ground.
The exchange rate has now moved up above €1.18, its highest point in a fortnight. The next key event in the calendar to watch out for will be the Bank of England’s policy announcement on Thursday 10th.
Has the market gone too long of EUR-USD? And is this the start of a turn-around for the plucky euro?
Edward Knox
Analyst
Caxton FX