Market Rumours

The current gains in EUR/GBP are likely corrective in nature, and should run into selling pressure at the 0.8775-0.88 retracement levels for a return to 0.86, says Barclays Capital. EUR/GBP now at 0.8777.

The Federal Reserve's surprise decision to increase the discount rate Thursday was keeping the dollar well supported in Europe Friday. However, the U.S. currency had backed down a little from earlier highs as the market now waits for any further data or Fed comments that might give some hint about the central bank will raise its Fed Funds target. Fed officials were quick to warn that the discount rate move was largely technical and didn't signal any tightening in monetary policy. The Fed had warned last week that this would be the first rate move. Nevertheless, the move is still being seen as a milestone indicating that U.S. banks probably don't need any more of the emergency funding that the discount window provides. Stuart Bennett, senior foreign exchange strategist at Credit Agricole in London, reckoned that the move "is likely to be interpreted as firing the start pistol on a move to a less accommodating policy." He said that although the process may take a very long time "the fact that it seems to have started should underpin the dollar as long as economic data continues to point to recovery, albeit a gradual one". The market will now be looking to see if the latest consumer price index out of the U.S. later in the day will in any way accelerate the need for a policy tightening. The data is forecast to show a 0.3% monthly rise in CPI in January, faster than the 0.1% increase in December. However, once higher gas prices are stripped out, the core CPI is expected to have risen by only 0.1%, the same as in December. While Fed policy is dominating sentiment, the problems of Greece and other debt-laden euro-zone countries continues to weigh on the euro. The market awaits evidence that either Greece is bowing to European Union pressure to introduce more austerity measures, or that other euro-zone countries have also employed derivatives to help them conceal debt.

While the major trend for EUR/USD is undoubtedly down, the over-extended nature of its decline from 1.4580 threatens a good short-squeeze, says MIG Bank's Howard Friend. This will likely appear from the 1.34 area and may well result in a 1.34-1.39 range forming. EUR/USD now at 1.35 from the day's 9-month low of 1.3443.

Sterling continues to be the pariah of foreign exchange markets, and the deeply entrenched bear trend against the U.S. dollar looks set to continue towards the psychological 1.5000 level.This fresh wave of pessimism has been created by the downside break into fresh 9-month lows below 1.5537, completing a 2-week bear flag in the process. Since losing 1.5537, a bear channel support line has been broken just beneath the 1.5500 area, and the inability to close the 1.5507/1.5493 downside gap highlights the ferocity behind this latest bout of weakness.

GBP/USD has completed a Bearish Flag pattern on the charts and tested the initial target of 1.5370 notes Barclays Capital. Risk now is for a decline to 1.5275 next and then 1.50 into March. This bearish outlook holds while the rate remains below the recent breakdown level of 1.56 says the bank. GBP/USD now at 1.5376.

USD/JPY cleared 92.00 overnight and a break above its 200 DMA at 92.27 would clear the way for a restest of the 93.78 January 2010 highs, says Lloyds Banking Group. USD/JPY now trades at 91.74 from the day's 5-week high of 92.10.

GBP/USD has lost 3 cents in the last 48 hours as the bulls run for cover notes Lloyds Banking Group. A weak retail sales report at 0930 GMT could spark the next leg lower with key support seen at 1.5352, although 1.50 looks achievable over coming weeks says the bank. The market consensus for January's weather-hit retail sales is a 0.5% decline although some analysts are looking for a drop of 1%