Bank of England throws the towel, will EURUSD 1.23 hold?

Bank of England throws the towel, will EURUSD 1.23 hold?
EURO Report

Current Environment

During this past week, Europe joined the group of nations that have shown economic contraction on a quarter-on-quarter basis. Yet, the ZEW Economic Sentiment for the euro zone showed an improvement in consumer sentiment. Trichet's hawkish words this past week also could be understood as bullish for the euro at face value, but that is also how the UK Governor King used to sound a few weeks ago and look at him now. Currency markets followed these developments boosting the euro to a record rise against sterling all the way to 0.8655 – a 5.3% EURGBP rise, compared to an average weekly fluctuation of 0.3% in this pair for the past three months.

Perhaps the notion that the Euro zone is handling the global crises better than the UK has some merit. The EU is more self-sufficient than the UK , it is also many times larger in terms of population and economic output. Perhaps the EU operates in a bubble where the woes of others are largely irrelevant, but then again, we live in a time where bubbles burst. All it takes is a major corporation having financial trouble, perhaps an icon in manufacturing to cast doubt about the EU economic resiliency. The lack of major EU economic news for most of the week should allow the euro to continue to gain grounds against the majors. The Friday PMI, however, could pose a potential hurdle for euro bulls.

STERLING REPORT

Current Environment

The UK economy has come under considerable pressure, as it is becoming evident that foreign investors are deserting UK investments and this is having a direct impact on cable. BoE Governor M. King likened last month the UK to an emerging market country in need of outside investment to finance a sizeable trade deficit. The higher return that foreign investors will demand for holding UK assets would raise costs for businesses and individuals, while further dampening economic demand. The BofE forecast announced Wednesday of a sharp 2009 UK economic contraction did not lift any spirits either.

The changing economic outlook should be an embarrassment for the Bank of England and for King, for their persistent hawkish monetary policy for so long. UK CPI on Tuesday should reveal the start of a falling inflationary trend, while UK retail sales on Thursday should highlight the cause: weaker retail consumption. In short, the outlook for cable this week is again poor.