Euro Sinking Towards 1.3500

Market Drivers June 10, 2014

UK/MP data meets forecast helping cable to poke back through 6800
Euro selling accelerates as 3550 in view
Nikkei -.85% Europe 20%
Oil $104/bbl
Gold $1254/oz.

Europe and Asia:
AUD NAB Business Confidence 7 vs. 6
AUD Home Loans 0.0% vs. 0.3%
GBP MP/IP 0.4% vs. 0.4%

North America:
USD Wholesale Inventories 10:00 AM

Better than expected UK MP/IP data kept cable afloat above the 1.6800 today while euro slid to fresh monthly lows helping to push EURGBP to retest of yearly lows near the 8060 level. The euro continues to see liquidation as the reality of ECB's negative rate policy begins to sink into the currency market.

The pair drifted lower through Asian and early European trade as shorts tried to run stops at the 1.3550 level. With Spanish yields declining below those of benchmark US 10 year rates, the EZ fixed market now offers less and less value to investors creating outflows from EZ bonds that are starting to the their toll on the euro currency.

Although the initial market reaction to last week's ECB announcement was rather blase with euro actually recovering most of its losses by end of day, this week's price action is much more negative as the euro continues to not only suffer from declining EZ rate but also from an improvement in US yields as well. After dipping below the 2.50% last week, US benchmark 10 years rates have remained steady above 2.60% level keeping the buck well bid.

Several analysts including Jan Hatzius are making the case that US growth is starting to accelerate after a lull in Q1 of this year due to seasonal issues. If this forecast proves accurate then the greenback should benefit further with EUR/USD sinking to 1.3300 and USD/JPY rallying to 105.00 as the summer proceeds.

Meanwhile in UK the MP and IP data both came in line at 0.4% which was actually viewed as an upward surprise by the market that was anticipating a bit lower readings. Cable popped back above the 1.6800 level on the news and generally remained relatively well bid as UK economy continues to send out positive signals. Later today the market will get the NIESR UK GDP estimate which could provide further boost to sterling.

For now sterling strength is best expressed through the EUR/GBP cross which continues to benefit from shifting interest rate expectations in Europe. If the markets become convinced that a rate hike from the BoE is likely to come this year rather than 2015, the downward pressure on the cross will accelerate markedly and the 8000 level will be given for the first time in two years.

Turning to North American trade, the calendar is once again barren and trading flows are likely to be driven by technical considerations as we approach key level in the EUR/USD. With the pair having now broken the 1.3600 figure, the attention of the shorts will shift to the much more important 1.3500 level. Although 1.3500 remains key support, it is clear that sentiment towards the euro has shifted markedly over the past 48 hours and the prospect of further decline in the pair now appears to be exceedingly likely.