Euro or Sterling

Both the euro and sterling soar against the “untapered” US dollar, as a series of disappointing US figures dampened chances of the Fed removing some of its $85 bn in monthly punchbowl.

Magnifying momentum on the falling US dollar were remarks by ECB’s Draghi indicating negative rates were on the shelf for now due to the declining pace of deterioration in the Eurozone. Using double negatives to indicating positive dynamics is sufficiently acceptable in a world when relative market expectations ruled the markets–especially FX. Although Draghi downgraded the ECB’s 2013 outlook for Eurozone growth, he sounded off a more upbeat view about 2014, expecting +1.1% instead of 0% to 2.0%.

As beneficial as today’s actions have been to the euro against the weakening US dollar, they failed to overtake the resilient sterling, whose gains emerged from 15-month highs in the services PMI and not “less dovish” remarks from the BoE as was the case with Draghi today.

Sterling’s rare superiority in the “fundamentals is seen in the charts of the global PMIs for manufacturing and services. For the first time in over 5 years, UK PMIs in both services and manufacturing have surpassed those of the US, China, Eurozone and Germany. With the Bank of England going as long as 12 months without increasing monthly asset purchases, such relative policy positioning is becoming increasingly positive for the currency. And with UK data hovering from neutral to positive, the case for additional asset purchases is weakened.

The prevailing source of possible “next selling wave” in the British pound remains associated with the arrival of BoE governor Carney, who could introduce a “growth” mandate to monetary policy anchoring, creating a dual mandate alongside the 2.0% inflation target. Such a change would enable the BoE to step-up any change in QE to meet the “growth” mandate and bring about a renewed sell-off in GBP. But until then, GBP strength is here to stay until EURGBP descends towards 0.8330s before stabilizing, and later rebounding towards another attempt of breaking the 5-year trendline of 0.8560 as Carney’s monetary creativity turns a new chapter towards policy easing.