GBP to Euro Exchange Rate Buying Interest Ensures Pound Dollar Rate is Kept Below 1.7

• The pound to euro exchange rate is at 1.2534.  
• The pound to dollar exchange rate (GBP/USD) is 0.11 pct higher at 1.7053.
• The pound to Aus dollar exchange rate (GBP/AUD) is at 1.8135.

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EUR/GBP is attracting the hot money

The decline in the euro pound exchange rate has attracted a significant amount of attention as of late as this appears to be the main channel within which interest in GBP is currently being expressed.

The result is the gains in the pound dollar rate have been relatively subdued and the peak of 1.7 has been difficult to break.

Commenting on the scenario is Lloyds Bank Research:

"While GBP rallied strongly after Carney’s Mansion House comments, it didn’t rise as far as might have been expected given the sharp move in short term UK yields.

|The UK's 2 year GBP/USD forward points far enough to suggest substantial scope for GBP/USD beyond 1.70.|

However, according to Lloyds, speculative money has probably preferred short EUR/GBP positioning, and this pair has continued its steady move lower and shown no inclination to recover above 0.80 since breaking it early on Friday.

"This suggests an extension of the move above 1.70 in GBP/USD may well require a recovery in EUR/USD, which itself may require some weaker than expected US data today," say Lloyds.

US dollar rate today

There isn’t a great deal on the calendar today other than relatively second tier US data, which may mean it is more of a market focus than usual.

"Even so, the USD looks likely to remain stuck in its post ECB range. In spite of substantial widening of yield spreads in the USD’s favour since the ECB meeting, the USD has failed to breach the highs seen in the middle of the ECB meeting, but has also failed to break below the lows seen by the end the of the week of the meeting," say Lloyds Bank.

According to technical studies, "stronger US data today may edge the USD index towards a test of last week’s highs at 80.90, while weak numbers would suggest scope to test the 200 day m.a. at 80.30, but it seems unlikely that either will break."

On balance, the risks may be slightly to the downside as positioning is long USD.

For the week, there will be some focus on the FOMC on Wednesday, but with growth forecasts likely to be downgraded it seems unlikely this will provide the USD with a major uplift.

Euro rate today: Relief for now?

1 week EONIA dropped briefly into negative territory for the first time last Friday, and even though we may see this become the norm this week as the ECB allow EUR108bn of SMP liquidity to flow into the market, the majority of the decline in term EUR rates now seems likely to be complete.

"While we do have the release of final Eurozone CPI today, this is unlikely to provide any surprise, so EUR/USD should remain confined to the 1.3503-1.3670 range seen on the day of the ECB meeting," say Lloyds.

Furthermore, "the chances of a break of the lower end of this still look greater, but the failure to breach the lows in spite of substantial declines in EUR short end yields last week suggest the chance may have gone for now."