Forex snapshot

Sterling sinks to a 14-month low after Mark Carney’s comments yesterday, while a surprise tick up in French inflation has assisted the euro.

Pound and dollar notes
Source: Bloomberg

Sterling at 14-month low

Sterling has struggled to crawl back the losses it suffered yesterday as a rate rise in the UK isn’t looking likely until autumn 2015.

In the overnight session the pound failed to retake the $1.58 level and is currently sitting at a 14-month low. Soft commodity prices are keeping the cost of living under control which is good for consumers but it is making it harder and harder for the Bank of England to hit its 2% inflation target. Mark Carney stated that inflation is likely to drop below 1% in the next six months and he also lowered the growth outlook for next year to 2.9% from 3.1%. Traders interpreted this as a sign that interest rates will not move until well into 2015, which will keep pressure on the pound.

Traders have been asking themselves who will raise rates first, the Federal Reserve or the BoE? In light of Mr Carney’s comments, the US central bank is tipped to be the first to move away from rock bottom rates, and this will keep sterling in its downward trend versus the US dollar, which began in July.

The $1.57 level is the initial target for sterling but if that level is punctured traders will look to $1.56. If the pound moves back above $1.58, the 100-hour moving average of $1.5854 will be in focus, and beyond that, $1.59 will be the next target. 

Euro steady after CPI data

The euro has edged slightly higher versus the US dollar after German and French inflation figures were released.

October’s CPI reading for Germany and France came in at -0.3% and 0.0% respectively. Analysts were expecting a reading of -0.3% and -0.1% respectively. Deflation is the biggest concern for the European Central Bank and Mario Draghi recently stated he would go down the quantitative easing route if necessary, but today’s inflation reports from the two largest eurozone countries won’t be triggering stimulus talks.

We would need to see a plunge in the cost of living in the region before Mr Draghi resorts to using ‘unconventional tools’. I feel the brakes have been put on the euro’s demise in the short-term. The situation in Ukraine is back in the news after Russian troops and military vehicles entered the country yesterday. Any reports of violence in the region may spark a selloff in the euro.

The near-term target for the euro is $1.25. If that level is taken out, this month’s high of $1.2577 will be on the radar and the $1.26 level would then be in sight. To the downside, $1.24 is the first port of call, and if the recent low of $1.2368 is cleared then $1.23 will be on dealers’ minds. 

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