The Pound is undervalued and May strengthen against the Euro, RBC say

The Sterling may strengthen against the euro in the near to medium term, according to RBC Capital Markets, which cited comments by Bank of England policy maker Adam Posen. Sterling may rise against the euro “over the next couple of years,” Posen told Parliament’s Treasury Committee in London yesterday. “In the immediate term, there’s a potential that slower action on monetary policy from the ECB than the BOE could lead to an interest-rate gap and push up the euro,” he said. The “pound took another leg higher on new MPC member Posen’s comments,” Adam Cole, global head of foreign-exchange strategy in London, wrote in a report yesterday. With the “pound still around 20 percent undervalued against the euro on medium-term competitiveness measures, Posen’s comments are not such a bold call,” he said. The EUR/GBP is currently trading at 0.8584 as of 8:38am, London Time.

The greenback and the Yen weakened against the euro before a U.S. report today that economists said will show the contraction in industrial production slowed, damping demand for safer assets. “U.S. data may spur hopes for an economic recovery,” said Shinichi Hayashi, a Tokyo-based foreign-exchange dealer at Shinkin Central Bank, the central institution for Japan’s financial co-operatives. “Rising equities will certainly lead to risk taking. The bias is for selling the yen.” The yen fell against the euro after the Bank of Japan forecast the economy will shrink 3.4 percent in the year ending March 2010, also both the yen and the greenback weakened after Intel Corp.’s revenue forecast beat forecasts yesterday and Goldman Sachs Group Inc. reported higher than expected earnings, damping demand for safer assets. The EUR/JPY is currently trading at 131.30 as of 9:07am, London Time.

Industrial production in the U.S probably fell in June, adding to signs the worst of the recession is over, economists said before a report today.
After factories slashed stockpiles in the first half of the year, they may get a boost from government efforts to increase spending, including cash payments aimed at reviving demand for autos. Even so, job losses will weigh on any rebound, meaning companies such as General Motors Co. and Chrysler Group LLC, two of the three biggest U.S. automakers, may be slow to recover.

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