Forex snapshot

Sterling is higher after the UK GDP report while the euro is rangebound ahead of the stress tests on Sunday. 

Dollar and pound notes
Source: Bloomberg

Sterling jumps after GDP report

Sterling received a shot in the arm on the back of the GDP report which came in a 0.7% on a quarterly basis, in line with estimates. It is worth noting that the rate of growth is declining; the UK economy increased by 0.9% between the first and second quarter. Even though the figure meets expectations, I doubt it will change monetary policy in the UK, which will prevent extended gains by the pound.

As I stated yesterday, the Bank of England have suggested twice in the past seven days that interest rates will remain unchanged until the middle of 2015. Sterling has been in a downward trend since July and the remarks from the UK central bank will reinforce the pattern.

Now that we have taken out $1.6060, the next target is the pre-BoE minutes level of $1.6120. The next level up is circa $1.6180 which was the recent high but it may be out of reach today.

Should the pound’s burst on the back of the GDP report run out of steam, $1.60 is the one to watch. The pound has found support around the $1.5952-$1.5957 area twice in the past three weeks so that is the next level watch on the downside. 

Euro could reach $1.28

The single currency has been drifting between $1.2640 and $1.2660 for the previous two sessions and it’s almost as if nothing can excite the currency. Not even the increase in German GfK consumer climate figures to 8.5 (vs 8.1 expected) has enticed traders. 

The US will announce new homes sales at 3pm (London time). We are expecting a reading of 473,000 for September. In August, new home sales rocked by 18% to 504,000 which was the biggest one-month jump since May 2008. Robust housing figures from the US will keep the euro under the cosh.

The stress test of the eurozone banks will be released on Sunday and that is the key focus for now. Out of the 130 banks under scrutiny, all but 18 are expected to be given a clean bill of health. I don’t foresee many traders building long positions on the euro on the run up to the tests, and this will keep the bias to the downside.

The euro has spent little time below $1.26 this month and if the level is breached then the October low of $1.2509 is in sight. If the stress tests go well, the euro could target $1.2720 and the next level is to look out for is the psychological $1.28. 

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