Pound trading peseta like as ECB meet highlights rate differentials

The ECB reaffirmed its inflation fighting credentials, raising rates a further 25bps to 1.50% at its July meeting, as we expected.  Governor Trichet’s term may be drawing to a close (November) but there was no sign of any mellowing in his tone, reminding at this afternoon’s press confernece that monetary policy is still accommodative and hinting that further tightening was needed despite the economic risks surrounding the seemingly never ending peripheral debt crisis.  There was at least one concession, the announcement that the ECB would suspend its minimum credit rating threshold for Portuguese bonds until further notice, citing recent fiscal steps.  But there was little real slack for governments hoping for any substantial monetary tonic.  The suggestion of higher rates was enough to tempt money back into the EUR, though the Euribor strip was little changed on the day suggesting FX traders might have got ahead of themselves.  Overall the EUR/USD picture is modestly bullish, we’d expect most will look to continue plying the range here, which on our chart looks set at 1.4160 – 1.4590 for the moment.

This backdrop couldn’t contrast more starkly with the fortunes of the pound with the BoE holding rates again.  There is little prospect of a hike this side of 2012 and given the patchy nature of the economic recovery even then the MPC is unlikely to be in that much of a hurry having sat through the current CPI hump.  Sterling has already suffered on the back of the increasing spread between UK and Eurozone rates with EUR/GBP hitting 0.90 again.  £8.00 cups of coffee (we won’t even contemplate what a beer costs) on the Cote d’Azur might be enough to persuade continental holiday makers EUR/GBP shorts are the way to go but it’s unlikely the pound will see anything but a short-term reprieve without a marked improvement in macro data.

2-year swap spreads suggest that there isn’t any floor under sterling; in fact the risk seems to be skewed to further weakness in trade weighted terms.  Of the major crosses GBP/USD looks the more interesting prospect technically.  The tone here is decidedly bearish sub 1.6140/60, in fact sub 1.6300 where TL and some of the more important longer-term moving averages are packed.  The first downside objective is to crack the recent intra-day lows at 1.5911/14, a stone throw away now.  Through there a run towards the 38.2% Fib line (1.5789) would be the aim. This needs to hold to avoid a deeper move back into the 1.5500 congestion zone and the Sep/Dec lows around 1.5350.