EUR/USD and Cable Poised to Strike Recent Highs Should US Fed Sound Dovish

The biggest mover inter-day has been the Pound to Euro exchange rate, it would seem yesterday's decline may have merely been profit taking.

Concerning the near-term forecast for EUR/GBP, FX Street say:

"EUR/GBP has accelerated the drop to reach a low of 0.8225 so far while Sterling is bid across the board, probing 1.5700 handle against the US dollar to reach a high of 1.5703 and currently has settled in 1.5690 area."

There has been some domestic UK economic news today with has prompted some Sterling buying, UK Public sector net borrowing looks better with the borrowing coming into negative territory (a surplus) at -£1.635B. Still below consensus for a reading of vs -£5.60B though.

More importantly, recovery in the UK manufacturing sector was confirmed with the CBI reporting that industrialist order books in the three months to August were fuller than they have been since August 2011.

Samuel Tombs, at Capital Economics, said the survey “provides another indication that the sector is recovering at a fair lick”.

TD Securities Bearish on the Euro

This afternoon we hear from Shaun Osborne who says he is a long-term Euro bear:

"The rise in EURUSD has stalled near key resistance at 1.3400, and while fundamentally our outlook for the US v. the EZ suggest these levels are rich, the narrowing of Eurozone-US short term spreads has continued to be an important support for EURUSD through the month long rally.  

"A further narrowing of those spreads overnight only reinforces that theme, but we have not shifted our overall bearish view for the months ahead."

Pound / US Dollar + Euro / US Dollar Poised to Take Out Fresh Monthly Highs

Despite the above views of Osborne, it is worth noting that the short term pressure for the Euro, particularly against the US Dollar is to the upside.

"With EUR/USD still holding near the 1.3400 level and cable within striking distance of 1.5700 and dovish hint from the FOMC minutes could push the pairs to 1.3500 and 1.5750 respectively as the day progresses," says Boris Schlossberg at BK Asset Management.

One key factor that many analysts will examine will be the question of interest rates.

Schlossberg says:

"FOMC cited higher mortgage rates as a potential risk in their July statement. In addition several members have stated that the QE in the MBS market appears to have had more impact than in the US Treasury market. Therefore, even if the Fed does taper, it may only do so in USTs rather than in the MBS sector.

"If the Fed does pursue such a policy it will viewed as mildly dovish with US dollar likely selling off in the aftermath of the release."