Currency War

It would appear that the world is on the brink of war. Currency war that is. According to the Russian central bank we are anyway. The comments come following Japans recent commitment to devalue its currency by increasing monetary easing within the country, in an effort to increase the country’s global competitiveness. Whilst at first sight the comments from Russia may seem alarmist, they raise a good point. If Japan is going to commit themselves to a policy of currency devaluation, it would appear inevitable that other countries will follow suit.

This follows comments made yesterday by Luxembourg Prime Minister Jean-Claude Juncker, who described the Euro as “Dangerously High”. This sparked a Euro sell off which led to EUR/USD dropping off to 1.3261 this morning after reaching a high of 1.3403 on Monday, its highest point since February 2012. Similarly the Euro weakened against Sterling as GBP/EUR reached 1.2097 this morning. This followed the pairs fall to 1.2011 yesterday, which was its lowest point in nine months, as the Euro had continued to strengthen on the back of ECB President Mario Draghi’s press conference last Thursday.

Cable finally broke below 1.6030 this morning after having been held at that level for the previous two days. The pair went on to hit 1.6003, testing a key Fibonacci level at 1.6010, before rebounding back to 1.6030+. The pair is again currently trading on the six month upward trend line after having briefly broken through this late last week. Continued downward pressure on Sterling following the World Bank growth rate downgrade and David Cameron’s persistent attempt to renegotiate Britain’s EU membership could see Cable fall back to 1.5911.

EU economic data released this morning showed Consumer Price Index figures for the region remained constant at 2.2% for December, as had been expected. We may well see further movement in the Dollar this afternoon as CPI figures are released at 13:30 in the US, along with US Industrial Production at 14:15 and the Fed’s Beige book at 14:15.

Mark Webster