Merkel gives the euro a boost

Morning Comment        

Current mid-market inter-bank spot rates (as at 08:00 BST)

Major sterling

Major US$

Sterling emigrate

Other sterling

Euro crosses

Data / Events due today

 

Fundamental

Another boost for sterling yesterday morning on the back of much stronger than expected retail sales figures. Spending in July rose by 0.3% from June and by 2.8% from a year earlier. June figures were also revised to +0.8% from a previously reported +0.1%, raising hopes that the 0.7% contraction initially reported for Q2 GDP may have been overplayed.

Headline Eurozone inflation was steady at 2.4%, just above the ECB 2% target while core inflation rose to 1.7% as expected, its highest level since February 2009. If the ECB is to stick to its price stability mandate, it may prove very difficult to cut rates in this environment.

In the US, housing starts weakened a touch more than expected although this was offset by a sharp rise in building permits. Although improving from July, the Philadelphia Fed manufacturing survey came in slightly below consensus at -7.1.

However, the afternoon session was really only notable for one thing; a broad based euro rally. The catalyst came from a slightly unlikely source as German Chancellor Angela Merkel backed ECB President Mario Draghi’s comments last month to do whatever it takes to save the euro. Risk sentiment in general picked up but it was the euro advance which led the way. The knock on effect saw Spanish bond yields close at a 6-week low.

A quieter end to the week on the data calendar after a few days of tier 1 releases. The relative lack of reaction to data this week suggests today’s data will have little impact.

Technical

£-usd

The initial 1.5630/25 support zone held firm yesterday morning, forming the basis for yet another attempt to test the resolve of the 1.5720/85 resistance zone. This in turn is also holding although the 1.5745 peak was the highest level seen since late last month. We open today hovering around the 200 day moving average (1.5718). Last night, we closed above this line for the first time in almost three months. If we see a repeat tonight to end the week on a high note, we may see pressure mount of the upper end of the resistance zone which in turn is the gateway to 1.5910, 1.6000 and 1.6060. Support today at 1.5700, 1.5680, 1.5635/30, 1.5580 and 1.5525/00.

£-eur  

The pound came close to testing the 1.2800 level yesterday morning but succumbed to euro strength in the afternoon session to close the day in the red. Sustained euro strength overnight sees us open close to 1.2705/00 support. Below here, we would look for further downside towards 1.2685/80 then 1.2650, 1.2615 and the strong 1.2575/60 area. Resistance now at 1.2740, 1.2795/1.2800, 1.2850 and 1.2890.

Analysis of further currency pairs, forward contract pricing, and information on limit or stop loss orders is available at any time on request.

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