Week in FX Europe – Is Sterling’s Magnetic Option Ride Over? Maybe Next Wednesday

Sterling’s wild magnetic ‘option’ strike ride (1.4950,1.5150) over the last two-trading sessions has managed to knock many weak short cable positions out. Governor King himself provided added fuel – “the recovery is in sight”- the only thing in sight is his impending retirement. His comments that sterling had probably weakened far enough prolonged the painful short-squeeze. This market may have misinterpreted his comments. Why would he be talking up the pound?

Sterling’s fall from such lofty heights has been swift, so much so that it had become a market congested with only sellers. Any ‘reversal-of-fortune’ would of course be rapid and costly – exactly what investors have been exposed to since Thursday. In truth, this market has become too fixated on a straight pound move.

At the same time, the 17-member single currency has managed to have its way with the “mighty dollar,” which would suggest more of a dollar move rather than a pound fixation. The dollars strength has come a long way and its only natural to witness a partial retracement. US data this week confirms that their economy is the best performer amongst the G4 major currency regions, whilst the UK entertains a triple-dip recession scenario.

If you believe in King, then his remarks this week will likely have watered down expectations for more QE next month. The techies will love it; an excuse to signpost that the low is in and that 1.50 is the new base. However, all the good work could come undone by next Wednesday’s annual UK Budget report when Treasury could change the inflation-targeting remit of the BoE.

• Majority of Europe Wishes to Exit Austerity, not Germany
• Greek Troubles Continue as Statisticians used as Scapegoats
• Bank of Italy Asks Lenders with Losses not to Pay Bonuses or Dividivends
• Greek Bailout Talks for Next Tranche Delivery Break Off
• Irish Bond Auction a Success
• UK Cameron Getting House In Order
• French President Admits Country will miss Deficit Targets
• UK Manufacturing Drags GBP Down
• German Central Bank Governor Warns Crisis not Over
• Merkel Coalition Partner Agrees with The Chancellor on Euro
• German Imports Rise in January

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