Weale Proves to be the Catalyst Needed to Trigger Fresh Sterling Weakness

The Euro is strong against the British Pound today with a fresh EUR rally being instigated on the back of the release of encouraging PMI’s.

"However the gains were short lived as EUR dropped lower on broader USD strength," points out Camilla Sutton at Scotiabank.

Losses against the US Dollar have fed into relief for the Euro / Pound exchange rate which is now off recent highs. Nevertheless, this is a worrying display of trend stalling for those hoping for yet higher levels in the GBP/EUR.

Eurozone PMIs were stronger than expected, with both manufacturing and services climbing back into expansionary territory (51.3 and 51.0, respectively).

German releases were notably strong with manufacturing rising to a two‐year high of 52.0; however the French report was weak as both measures dropped into contraction (49.7 and 47.7, respectively).

British Pound weakness exacerbated by Martin Weale

The Pound has had a good run against the Euro as of late, and these elevated levels would eventually have to give.

However, the trigger of the current pullback is being attributed to Bank of England MPC member Martin Weale.

"GBP has dropped as the BoE’s Weale suggested that asset purchases remain a tool that is available. This has stirred market fears that the BoE would consider backing its forward guidance with a more aggressive QE stance," says Sutton.

Scotiabank advise that they do not see the current environment as supportive for another round of GBP asset purchases, "however do believe that the BoE will firm its communication highlighting how policy is likely to diverge in the UK from the US."

Adding to this theme is the team at Commonwealth Foreign Exchange who say:

"The pound also suffered from mounting concern that its recent rally may have gotten a bit overextended. While strong economic data in the U.K. does suggest a very limited risk of additional BOE easing, the pace of the pound’s appreciation could actually threaten the economy’s nascent recover.

"The pound remains vulnerable to signs that monetary officials are becoming unhappy with the currency’s recent rise."

US Dollar rallies across the board

The U.S. dollar continues to trade higher against most of the major currencies this morning with USD/JPY leading the gains giving investors hope that the currency pair is finally waking up to the rise in U.S. yields.

"Although the slightly softer weekly jobless claims report erased earlier losses in Treasuries, investors around the world have their eyes locked on the 3% target for 10 year yields.  Yesterday's FOMC minutes basically confirmed that there is enough support inside the central bank for a reduction in asset purchases this year," says Kathy Lien at BK Asset Management.

Lien says that so as long as U.S. data isn't terrible, it should only be a matter of time before yields test 3%.

However, further moves beyond that rate could be limited because a) the market has had plenty of time to price in tapering this year and b) the Fed will do everything in its power to prevent a sharp increase in yields especially since U.S. data has been far from inspiring.