Sterling Eases Against Euro Following Fresh 7-year High

Sterling has drifted lower, but continue to trade in an upward trend with Cable pushing towards 1.5400 after opening near 1.5430. The EUR/GBP has also lifted some. The pound had in Asia made a fresh seven-year high against the euro. The cross EUR-GBP will grind to 0.7000 in time, with the ECB’s commencement of QE in March setting the euro up for further declines while the BoE draws nearer to a tightening, albeit not likely until 2016.

Bank of England Monetary policy member Forbes sounded out hawkish-leaning remarks, describing the UK as in a solid, sustainable recovery. She continues to say that tightening will be data dependent with a focus on wages. She also strongly downplayed deflation risks and argued that the external factors causing current low inflation rates should fade fairly quickly. Her remarks are consistent with the mainstream view of MPC members, and with prevailing expectations for a 25 basis point hike in the repo rate in Q1 2016.

In Europe, German Import prices dropped -4.4% year over year in January, with prices down 1.7% month over month. The further decline from an already very low -3.7% year over year was mainly due to lower energy prices and excluding petroleum the annual rate actually jumped to 0.7% year over year from 0.1% year over year. The decline in the EUR is being felt and the numbers are a further sign that the weak inflation environment is mainly driven by lower oil prices and that there is no real risk of a deflationary spiral.

Momentum on the EUR/GBP currency pair remains negative with the MACD (moving average convergence divergence) index printing in the red. The relative strength index (RSI) is printing a reading of 30, which reflects and oversold condition and could foreshadow a correction.

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