Currency markets were saw mixed price movement yesterday with the Euro standing out as the key performer during the US trading session. Retracing back from a low of 1.1995 the GBP/EUR saw a corrective move of over 2 points with an overnight low at 1.1787 (support) – slighty up on the day today however price movement remains quite stable at present. It briefly broke through the $1.32 level versus the dollar trading back from a low of under 1.30 – dropping over 10 points in over 2 weeks. It then fell back sharply after Trichet failed to signal that the central bank will increase its government bond purchase. However, it recovered ground later on talk that the ECB was quietly buying assets in the market aswell as the successful aution on its government bonds. Spreads between peripherals and core eurozone bonds narrowed in the afternoon, helping the euro push back through the $1.32 level versus the dollar, while also making modest gains versus sterling.

Key fundamental releases came from the European Central bank with Jean Claude Trichet making a statement with regards to the state of the European banks, In an unexpected move the European Central Bank did say yesterday that it will keep giving banks unlimited funding well into next year, which should help ease funding pressures. In other words, for now, the central bank has abandoned plans to scale back on removing special support facilities to the market. This should also provide some underlying support to the euro which is evident from this morning opening price levels. In yesterday’s ECB press conference, Trichet outlined the central banks’ latest staff forecasts for GDP growth and inflation.

The new ECB forecast puts 2010 GDP in a range of 1.6% to 1.8%, with a growth midpoint of 1.7%. That compares with a range of +1.4% to +1.8% and a midpoint of 1.6% in the September forecast. For 2011, the staff now projects growth in a range of 0.7% to 2.1%, which gives a midpoint of 1.4%. In September, the forecast for next year was in an extremely wide range of +0.5% to +2.3%, which would give the same midpoint of 1.4%.

The ECB members also released its first GDP forecast for 2012, putting GDP in a wide range of +0.6% to +2.8%, for a midpoint of +1.7%. An upward revision to the 2010 growth projection had been widely expected, given the much stronger than expected growth performance of Q2, when GDP rose by 1.0% and the fact that the deceleration of growth in the third quarter was not as sharp as had been feared. On the prices front, the new forecasts continue to show inflation well below the ECB’s 2% target. The HICP projection for 2010 is unrevised from September in a range of 1.5% to 1.7%, a midpoint of 1.6%. The ECB staff increased marginally its HICP expectation for 2011, with a range of 1.3% to 2.3%, giving a midpoint of 1.8%, up from 1.7% in September. In terms of 2012, the HICP is forecasts to be between 0.7% and 2.3%, a very wide range with a midpoint of 1.5%.

The Dollar has been losing ground against its main rivals on Friday, with risk appetite dominating, and European equity markets slightly higher ahead the release of November’s US Non-Farm Payrolls Report. EUR/USD recovery from 1.2965 low on Tuesday has extended past 1.3250 to 1.3270 day-low, and the GBP/USD reached a fresh week high at 1.5685 before pulling back to 1.5620. USD/JPY remains trading between 83.50 and 83.70 after rejection from 84.40 high yesterday while the USD/CHF moves in range between 0.9890/00 and 0.9940 after having dropped from levels above 1.000 yesterday.

Looking at the higher yielding currencies the AUD and NZD continue to perform well, the GBP/AUD price level has broken the key 1.60 psychological level and presents a good opportunity for any sellers.

Tom Trevorrow
Senior Trader / Tor Currency Exchange Ltd.