EUR/GDP Could Hit Parity - Or Correct

As you know, I have been very bullish EUR/GBP this week. On Monday, I showed you this chart of EUR/GBP and told you that is headed for 90 cents from 87 cents and today it has pretty much reached that level. The high in EUR/GBP was 0.89978, 2.2 pips from my 0.90 target.

One of the questions asked in the comment section of my blog earlier this morning was “Is it time to sell near .90 or will it continue to slowly go up?”

As you can see in the chart below, the retracement off the 90-cent high was pretty brutal. Although I think that EUR/GBP could hit parity, we may be due for an even larger correction that could take the currency pair back to 0.8750.

Comments

[Alex Filonov:]

Doing linear extrapolation, aren't we?

2008 Dec 12 07:52 PM

[Joe Gelet:]

EUR/GBP not EUR/GDP correct?

2008 Dec 12 10:04 PM

[peterthepai...:]

the cost of our winter week in the canaries has just about doubled since last year

so will probably stay home in palookaville...

2008 Dec 13 06:28 AM

[morph366:]

Chances are good that forex traders will take advantage of illiquid trading conditions between Christmas and New Year to take a shot at parity.
What does the UK government do if there is a sterling crisis with the B of E talking down short term rates and a need to raise about £120 billion next year?

2008 Dec 13 06:35 AM

[De Graaf:]

Miss Lien, you said:

"Although I think that EUR/GBP could hit parity, we may be due for an even larger correction that could take the currency pair back to 0.8750."

I consider the move to .89978 a large move. And ot hit parity (1:1) can be considered a large move. But a correction to 0.8750 is not "an even larger correction". Wouldn't you agree?

brgds.

2008 Dec 13 09:08 AM

[NOWHEREMAN:]

If Opec makes good on the "greater" than expected production cut, the Pound will soar against every other currency, including the Euro. Down to .81 would be a more likely scenario.

Personally, any Major reserve currency decline of 25% within the space of 2 months seems a bit bubblish to me as was the Dollar's appreciation.

Last week LIBOR dropped about 10%. This means risk aversion is disappearing, which in turn should cause a further decline in the USD.


If Oil moves up sharply and stays up, The USD will not go up at the same time but the British Pound will rise faster against it than against the Euro which will also appreciate against the Dollar.

Just an opinion based on the movement of the Dollar in the face of rising oil prices.

2008 Dec 13 11:46 AM

[abcde_98:]

i'd say the next relatively significant move of EURGBP will be based moreso on fundamentals (vs pure technicals)

UK is generally expected to reduce rates in January
EU rate decision in January now seems uncertain due to yesterday's statement/opinion by someone in the ECB that further rate reductions are belived to be limited.

The EU/ECB doesn't work so well in my opinion because there is rather wide divergence in the EU members' economies. This could be why the ECB often goes with the status quo (ie, no rate change) and is slower to act (change). But then again, Hugh Hendry had an ear-opening comment on CNBC in late October where he criticized the ECB's inaction and called it "the most conceited....(bunch of people)" (Google it for the eaxct quotation).
How the ECB thinks future rate cuts are limited is beyond me... their economies are doing poorly and seemingly will get worse, especially the Brit's tourism spending in EU, and banks who lent money to in Central/East Euopean homeowners who will have a very difficult time repaying the Swiss Franc/Euro loans.
Does the ECB have the best interests of EU citizens in mind?

ECB actions are perplexing.

2008 Dec 13 02:29 PM

[Asbytec:]

abcde_98, it's a good question and has been asked many times. I dunno, but I suspect they do. In fact, I've grown to admire their patients. It seems, really, liquidity is not the problem...lending is...over here and over there. I think they realize banks are awash with cash and any reduction in interest rates won't foster lending. Not even Fed's move toward zero will help spur lending, and neither would an ECB move.

However, in the face of falling asset values; global recession or worse; rising jobless claims; having been stung with bad loans; and straddled with write downs and pay outs, well...it just isn't a good environment for lending to any one despite the rates. Everyone is a credit risk, especially in the private sector.

So, as conditions worsen in the EU due in part to a strong euro, falling trade, global recession, and downward pressure on prices the ECB might have no choice but to follow the rest of the world below 2%. Besides, this is a coordinated game the central banks are playing. The Fed says cut, everyone cuts...at their own pace, of course.

After all, we're all trying to stave off deflation. But one can understand the ECB being cautious under their mandate to control prices. Once things get moving in the credit markets, prices will spike hard and everyone will be fighting to get them back under control. The ECB is just standing farther from the fire, for now.

I don't follow the EUR/GBP pair closely, but I suspect the euro will resume a downward trend in the next quarter. Just my guess...

2008 Dec 13 03:03 PM

[abcde_98:]

Asbytec, thanks for your response. I've often wondered why the rate cuts have continued when the previous ones have had very little effect (yes, easiest/quickest tool for a central bank, gives perception of trying to help an economy even if know it might not have little effect).. Id say a floor of 1% would be good vs 0% (maybe the Fed can learn from Japan) or 5% (maybe the ECB can learn from others).vs 2%/2.

In another article ECB member Weber gives 4 reasons for possibly stopping the rate cuts. I was rather surprised at the reasons. You touched on 1 or 2 reasons. I'd appreciate your thoughts on Weber's reasons and my response comments. It's good discussion.
Here's the link to Weber's comments / my thoughts.
seekingalpha.com/artic...

2008 Dec 14 12:34 PM

[Asbytec:]

Thank you for your comment. I read your comments on the URL. I agree with you, next year will see further contraction. A turn around is optimistic and unlikely, in my view, but not out of the question.

I have been complaining for months the ECB needs to get with it. Seems you're on that same stump...LOL It's okay...not sure who is right, just gut instinct. If they need to tighten, they have tools other than interest rates to do so.

I am hoping the Fed will raise the reserve rate, lower the money multiple, and make more use of SFP bills. With such tools, they can spur demand for borrowing at lower rates while keeping the money supply from exploding. The ECB could do the same, I believe. But, will they?

I just don't see the ECB moving on interest rates until next quarter after they get some data, as you mentioned is kind of late in the game. And even then, they'll be hawkish. I am starting to think that's a good move and the Fed should stay at 1%...no less that 0.5%. I think zero spells real trouble.

I like the idea of QE, but not sure of it's long term outcome. Will we become like Japan? Or should we just let this thing hit us and let the markets correct? They are going to correct anyway, sooner or later. Maybe better sooner.

Check out this detailed URL, if you haven't already. Very interesting read.

www.actionforex.com/lo.../

2008 Dec 16 04:44 AM