The Euro has gained considerably in the last week as speculators confidence gains on news that sovereign debt problems seem to be subsiding. The Euro is also being fundamentally supported on inflation concerns in the Eurozone.

It is unlikely that in the short term investors will sell back into the euro on the news last week that the ECB is increasingly worried about inflation in the Eurozone. Jean Claude Trichet clearly stated that inflation must be watched closely and acted upon if necessary. Trichet accepted that any rise in interest rates could cause paralysis for some member states overburdened with debt. However he indicated that if interest rates had to go up to control price stability the ECB would respond accordingly.

As a result of recent ECB comments and events markets will pay close attention to the key Eurozone data releases this week. Today’s news sees Flash PMI’s for January as well as German inflation data later this week.

The GBP/USD pair is expected to have a volatile week ahead, the spotlight will fall on the Bank of England’s minutes release from their January policy meeting. Market expectation is that the BoE will have discussed the mounting inflation problems and will have indicated what might be in store to keep price pressures in check. Any tightening in lending conditions however could damage the already anaemic growth in the UK and force a double dip recession.

We would expect the GBP/USD pair to continue to retest 1.60 and potentially break the 1.60 level this week if the minutes of the BoE meeting indicate up and coming interest rate hikes. The GBP/EUR pair has continued downwards yet will probably meet support as focus shifts towards the minutes.

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Best Regards
Luke Zorab

Torfx Currency Dealer

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”