Last week saw significant volatility in FX markets, the Euro gained against both Sterling and the US Dollar despite problems in Ireland and the announcement of an Allied Irish Bank bailout package set to cost the Irish tax payer €50 billion.

The main reason for the current Euro strength is recent positive GDP figures, and last week’s S&P report. These indicate that the Eurozone is now unlikely to face a double dip recession and will therefore not need to undertake a Quantitative Easing (QE) program. At the moment it looks as though the Euro is set to make further gains against a weak pound and even weaker US Dollar.

The ECB meets this week with no policy changes anticipated. Markets will however be paying close attention to Mr Trichet’s rhetoric on interest rates. Most expect him to continue to indicate that rates will remain on hold for a prolonged period.

The main concern for the UK economy is the announcement of austerity measures set to reign in the UK’s budget deficit on the 20th October. This is contributing towards negative sentiment in UK markets, helped by last week’s Bank of England announcements suggesting that additional QE may be required to further stimulate the UK economy.

September’s payrolls report should dominate focus in the US this week as markets look to Friday’s Non Farm Payrolls report and continue to speculate whether the Fed will undertake QE. Any further evidence of a faltering economic recovery in the US could quickly lead to a break in the GBP/USD 1.60 level.

Sterling has recovered some of last week’s losses by mid afternoon today, up 0.9% against the US Dollar and 0.35% vs the Euro.
Stocks are up 0.2% in the US (Dow), and down 0.7% in Europe (Stoxx 50).

Support and Resistance
GBP/USD – Support 1.5670 / Resistance1.5924
GBP/EUR – Support 1.1330 / Resistance 1.1727

UK Economic Releases
EU-16: 0930 Sentix Investor Sentiment
EU-16: 1000 PPI (August)
US: 1500 Factory Order (August)
US: 1500 Pending Home Sales (August)

Regards

Luke Zorab
Torfx Currency Dealer