Divergent monetary policy stances likely to be the focus

Euro Research Report

Governor Carney urges markets to look through temporary inflation drivers

"Grexit" is avoided for now

Divergent monetary policy stances likely to be the focus

Sterling Euro (GBPEUR) FX Technical Analysis

The Sterling Euro exchange rate moved to 7 year highs as ECB President Mario Draghi pledged to buy 60 billion worth of euros a month in assets including government bonds till September 2016, in an attempt to stave off deflation and boost the Eurozone flagging economy. This pledge was quickly digested by the market and the news of a possible Grexit suddenly took centre stage. The announcement of Quantitative Easing combined with the uncertainty surrounding the possibility of contagion to other Euro nations helped weaken the Euro and propel the Sterling Euro to the highest levels last seen in 2007.

The recently elected Syrzia party had originally promised to rip up the terms of its current bailout package and unravel many of the harsh austerity measures put in place following the country’s last international rescue. The current € 240 Billion bailout programme however expires at the end of February. Greece needed an extension to avoid running out of money to service its debt and fund its social programs and also to help stem deposit flight from their financial system. Without an agreement Greece would inevitably have been thrown out of the currency bloc.

After much debate, the Euro group and IMF have preapproved the Greek government’s general policy proposals and reforms, in exchange for a four months extension. There are still doubts over the willingness of Greece’s left-wing government to follow its creditors orders on budgets and economic overhaul and the ECB have made a concise effort to remind the markets that they have the power to veto any additional funding if they feel Greece is not living up to its promises. For now markets have taken the Greeks at their word and although this is clearly a case of "kicking the can down the road" markets have stabilised and are now concentrating on the effects of monetary policy and the Euro has continued to weaken.

It appeared that towards the back end of 2014 the UKs recovery was starting to lose some momentum however the UK has made a strong start to 2015. The unemployment rate hit a 6-Year low, while wage growth soared above expectations and to an 18-month high. The Bank of England is now assessing the strength and health of the UK labour market and the implications it will have on inflation. This has been reflected in the more hawkish inflation report stating that despite inflation dropping to the lowest level in 25 years, it was merely a temporary drop due to one off factors like falling energy and crude oil prices which are highly volatile. The Bank of England has said these factors should dissipate throughout the end of the year and they will continue to move towards normalizing the rates otherwise risk overshooting their 2% target in the second half of 2017. It seems that the divergent policy stances of the relative Central banks will drive the exchange rate for the foreseeable future and that Gbp/eur should edge higher.

For EUR Buyers

Currently trading at 7 year highs and the RSI's (momentum indicators) look overbought on both short and long term charts. These indicators can remain overbought for quite some time though and I would only reduce near term exposure for the time being. Having broken through the internal trend line at 1.3600 this can now be used as support and short term protection can be safely left below here targeting 1.4000.

For EUR Sellers

It really is difficult to see and relief on the horizon. If you are fortunate enough to see a retracement to 1.3600 then you need to sell there as if the status quo is maintained 1.4000 is the next level on the upside.