Dollar eases back

Aggressive dollar strength overnight has eased back in the morning session. 

A dollar and sterling note
Source: Bloomberg

EUR/USD below $1.05

The picture of the eurozone and the implications on the euro continue to be tweaked on an almost constant basis as the markets have numerous issues to juggle with. The aggressive nature with which the Greek finance minister and government have decided to tackle the issue of fiscal support from the eurozone and International Monetary Fund has seen them rub numerous people the wrong way.

Over the next four months Greece will need to meet various deadlines for returning funds, and where these will come from remains unclear. The question over Greece’s membership in the eurozone is still not conclusively answered and this has seen faith in the single currency questioned once again.

Apart from the political issues swirling around the eurozone, the region has on Monday embarked on its version of quantitative easing. Purchasing €60 billion of eurozone sovereign debt on a monthly basis has placed a burden on the euro, as the global perception is one of a currency being devalued by its own finance ministers.

Overnight EUR/USD fell below $1.05, but in early European trading it has bounced back above $1.06. Institutions are now once again reassessing targets for EUR/USD and parity in the first half of 2015 is looking increasingly likely.

Spot FX EUR/USD chart

GBP/USD oversold

Yesterday saw GBP/USD break below $1.500, something that we have been calling for some time. The inability of the currency to hold onto this level has as much to do with the respective values of the dollar and sterling as it does the weakness in the euro.

The UK sits on the outskirts of mainland Europe with the eurozone its largest trade partner. As questions continue to be asked surrounding the strength of the eurozone union and its currency, it is only natural that an increased risk to the UK economy and the pound is factored in.

Another issue that has yet to gain the full focus of the currency markets is the looming UK general election in May, and the likely consequence that there will be no majority government and another coalition government required. This is likely to see increased uncertainty and fresh weakness on the pound.

In the short-term GBP/USD may well be oversold but the longer-term picture would suggest even more is set to come. Lows of $1.43 from the summer of 2010 could start to figure in currency markets’ minds.

Spot FX GBP/USD chart

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