2014's Best GBP/EUR and Dollar Exchange Rate Levels DISAPPEAR as Markets Continue the Selling Pressure

The reason the GBP has come under pressure in mid-week trade lies with the Bank of England's top team who told the Treasury Select Committee (TSC) that they were not rushing to raise interest rates.

From what we are hearing it would seem the Bank is not as eager to raise interest rates as markets initially assumed. The reaction in the forex markets is notable:

• The pound to euro exchange rate (GBP/EUR) is trading 0.24 pct in the red having reached 1.2454.
• The pound dollar exchange rate (GBP/USD) is trading 0.17 pct in the red at 1.6957.
• The pound to Australian dollar (GBP/AUD) exchange rate is 0.11 pct lower at 1.8115.
• The pound to Canadian dollar (GBP/CAD) is 0.13 pct in the red at 1.8231.

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What is the Bank of England saying?

Deputy Governor Charlie Bean has told the TSC that there is still more 'slack' in the labour market - i.e productivity amongst the workforce remains suppressed. The idea here is that interest rates can be kept low as long as this productivity problem persists.

Further, Bean said he prefers the case for a later than earlier exit from stimulus - sterling exchange rates are currently priced for an earlier exit, so this is not what the bulls want to hear.

Governor Carney also mentioned that wage data has been softer than expected.

The testimony is ongoing and we would expect volatility to remain elevated.

Pound exchange rates struggle

The recent rally in the GBP complex has all but faded now.

A steady day for sterling yesterday as it tried to hold onto recent record highs. With little economic data from the UK yesterday, movements were dictated by market data releases elsewhere.

In spite of European manufacturing growth data coming in below expectations, sterling weakened slightly, ending the day marginally down.

"GBP came under a little corrective pressure yesterday and could continue to see some this week as the market pares back what are quite extended long GBP positions," says Lloyds Bank observing that markets are primed to cut back exposure on the currency after a recent strong run.

Furthermore, "with the market also potentially nervous of the FPC report on Thursday, the risks for GBP may consequently continue to be on the downside. EUR/GBP continues to be the cross where positioning is most extended, and while we would not expect a major reversal at this stage, it would not be surprising to see another test up towards the 0.8030 area. The main GBP/USD support should be in the 1.6940 area."

Euro dollar exchange rate mired in recent range

Despite the weaker than expected Eurozone PMI data yesterday, there was very little market reaction, and EUR/USD remains mired in the middle of its post-ECB range.

"1.3503 and 1.3677 were the extremes seen on the Thursday and Friday post ECB, and we are now in our 12th day within this range, with no obvious triggers for a breakout," say Lloyds.

According to Lloyds it is hard to use this as a new reason for EUR weakness when the US Q1 GDP data is expected to be revised down this week to -1.5% q/q annualised (or worse) and the recent FOMC gave no hint of any more hawkish stance.

"At the same time, weak Eurozone data isn’t really having any significant impact on yield spreads, with EUR yields already essentially rock bottom. This leaves little obvious reason for a market move, except a concern that short EUR positioning is quite extended and in the absence of news the tendency may be to square these positions. For that reason we suspect that a break higher in EUR/USD through the 1.3677 level may ultimately come before a break lower through 1.3503, but it doesn’t seem imminent today," says Lloyds.