Fresh economic and financial news contributed to another day of heightened volatility in the currency markets yesterday and we noticed interesting price action on all major instruments on the back of these new developments. Traders were focused on the economic reports coming out of the Euro-zone while later in the day the release of the Fed minutes from the their last monetary policy meeting added insight to the central bank’s views.
The important message that the Fed minutes carried was that the central bank seems committed at this time to their rate hike plans and their timetable seems to point towards September as the preferred date to act. Even the most dovish members of the FOMC committee expressed their preference for at least a gradual increase in the rate levels which leaves little doubt on what to expect.
At the same time the recent reports from the Euro-zone revealed what we expected, a continued weakness in the fundamentals of the region while ECB’s QE programme is underway. It is our estimation that even though there is weakness in the region at this time, given enough time the easing programme will slowly invigorate the economic climate and eventually help the area climb out of the recession but not soon.
The Euro remained weak yesterday and is expected to test the 1.0720 floor pretty soon as traders continue to build pro-Dollar positions, especially after the confirmation that the Fed intends to hike rates even after the recent NFPs miss. The bias remains to the downside and although the momentum has slowed down it will take an important fresh development to shift momentum.
Cable was a different story yesterday as the currency managed to disregard the recent bearish bias and climbed higher at least at the beginning of the day. News of a potential takeover of the British oil and gas exploration company BG Group (LONDON:BG) from the Royal Dutch Shell (LONDON:RDSa) for an estimated £47 billions price tag attracted investors interest as the expected FX flow on the back of the deal will be significant.
However market participants welcomed the rally above the 1.4950 level as an opportunity to sell the Cable higher and by the end of the day the currency traded back to the 1.4850 level. The sentiment for the Cable remains moderately bearish ahead of the upcoming UK elections and yesterday’s price action confirms traders’ hesitation to back the currency at this time. Thus we should expect further weakness from the Cable in the upcoming sessions.
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