Pound to euro: GBP/EUR boosted by a new bout of doubt on global markets; 1.2 beckons in the near term

Last Updated on Friday, 10 February 2012 12:29 Written by Rob Samson Friday, 10 February 2012 12:26

The pound euro exchange rate (GBP/EUR) finds itself 0.55% higher on yesterday's close at 1.1972 at 12:22 in London.

An initial spike in pound to euro after the Bank of England MPC decision was short-lived; the UK currency fell back through the evening session. A new bout of doubt on the exchange rate markets this morning has since provided welcome support for the pair.

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Indeed, we could see the exchange rate retake the 1.2 level if we consider the weekend of uncertainty lying ahead.

Exchange rate analysts at UniCredit Bank have also forecasted more cable weakness (GBP/USD) to come due to a poor UK economic outlook in comparison to an early bottom-building in the US.

This dynamic could however prove to be supportive of GBP/EUR which tends to thrive in times of gloomy data.

In the near-term we are unlikely to see any major moves.

UniCredit forecast some consolidation ahead of the effective implementation of the new rescue package should be now the name of the game. The data calendar should also keep trading subdued.

EUR/USD dropped to 1.3050 after failing to attack the next targets at 1.3350 and 1.3450. The overall EMU picture and chart indicators still suggest that a complete trend reversal is still quite unlikely, but selling pressure will hardly accelerate as long as 1.3240 holds.

News overnight of Greek politicians reaching an agreement on fiscal consolidation measures has reassured the market. However, the political brinksmanship up until the last-minute agreement once again revealed the degree of challenges the Greek government will face in its implementation.

Indeed, the FX market reaction has been rather subdued, suggesting that much of the good news is already priced in.

With the second 3y LTRO approaching, the room for further EUR appreciation is likely limited, in our view, and we recommend using EUR and CHF as funding currencies against those that have closer economic ties with the US and China, such as the MXN