Forex snapshot

GBP/USD jumped above $1.7000 in evening trading yesterday, while EUR/USD threatens to break the $1.3700 level.             

Dollar and pound notes
Source: Bloomberg

EUR/USD shows no sign of slowing down

Yesterday saw German retail spending reduce and eurozone inflation remain the same. Both of these factors have helped contribute to the euro continuing to strengthen against the US dollar, much to the disappointment of the European Central Bank. Last month’s statement from president Mario Draghi had an instant reaction to EUR/USD as it dropped to $1.3505; however this weakness lasted less than a day.

The negative interest rate on bank deposits has already been implemented, but the targeted long-term refinancing operation changes are not due to begin until September and, other than trying to talk down the strength of the euro, it is difficult to see what the ECB can do.

As my colleague David Madden has stated, the next target was the 200-day moving average at $1.3688 and this has now been broken. Higher highs now look possible.

GBP/USD heads higher

GBP/USD looks to have finally unshackled itself from the $1.70 level, as last night’s trading set the precident for this morning’s move. Of course the steady flow of solid or improving economic data that the UK has been able to release over the last quarter has helped build confidence in the currency strengthening. The last few weeks have also seen the Bank of England governor Mark Carney inadvertently stir things up.

The market’s reaction to Mr Carney's Mansion House speech seems to have caught him by surprise, as the speed with which he back-peddled the following week indicated that an interest rate rise this year was still unlikely. The one thing that markets can be sure of is that the Bank of England is looking at when – not if – they will be able to increase interest rates, and that looks to be a step further down the road than the Federal Reserve and the US economy.

At the moment the relative strength index for GBP/USD has moved into overbought territory and, from a technical point of view, a corrective respite might be in order, although the fundamentals still look strong.

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