ECONOMETER

The USD has taken a steady path of recent days, with little move in either direction, reflecting the general malaise in currency markets waiting for an outcome to the Greek debt talks. However, hopes that an agreement will be announced shortly saw the USD lurch lower overnight. The conflicting forces of firming US economic data on the one hand and uncertainties in Greece on the other have left market participants in a bind.

The USD has at least purchased some solace from reduced expectations of quantitative easing but as we noted earlier in the week the Fed may still carry out QE despite of better data. The USD could also suffer from the fact that US bond yields remain relatively low compared to some other major countries.

Indeed, the Fed’s commitment to maintain accommodative monetary policy until the end of 2014 suggests that the USD’s use as a funding currency could continue for a while longer. We look for the USD index to consolidate around the 78.50-79.00 level over the short term.

GBP’s recovery from its lows around 1.5233 on 13 January has been impressive. GBP’s gains are not as strong as that of commodity and Scandinavian currencies but it has outperformed the EUR. We expect this to continue.

Like other currencies GBP has benefited from a widening yield gap between the UK and the US. This has little to do with UK policy expectations given that the Bank of England is expected to initiate more quantitative easing this week. The move in relative US–UK yield differentials has more to do with the rally in US interest rate futures since the start of the year, supported by the recent dovish FOMC statement, which has put the USD under a degree of pressure.

GBP gains will be limited ahead of the BoE meeting tomorrow, with technical resistance seen around 1.5931 vs USD. Against the EUR much will depend on Greek debt talks but eventually we look for a retest of the EUR/GBP January lows around 0.82213.