Prompted by support Sterling recoops

The sterling benefited from some support on Monday, helped by a souring of sentiment towards the eurozone.Concerns are rising with respect to the political situations in Spain and Italy, which weighed on global stocks and pushed eurozone bond yields higher. Sterling has had some more good news this morning in the form of a positive UK services PMI figure which has revealed that the sector returned to growth in January.

STERLING/EURO: Sterling recouped almost two cents as eurozone concerns return.

•    Concerns that PM Rajoy will be forced to resign and the fact that Berlusconi gained ground in the polls over the weekend are hurting the euro. This gave the market the perfect excuse to sell the euro and bank the profit on its impressive recent rally.

•    This morning’s UK services figure was surprisingly strong, which could help sterling to another firm session. For now this pair trades below €1.17.

STERLING/US DOLLAR: Strong UK services figure has helped sterling to further gains.

•    For once, the market was willing to turn a blind eye to some disappointing UK data. The construction sector suffered further contraction in a snowy January. Reaction has been more noticeable to this morning’s UK services figure, which is a key gauge of UK growth. The figure was the strongest in four months and will ease triple-dip concerns somewhat.

•    Sterling has bounced close to $1.58 but upward progress from here may slow.

EURO/US DOLLAR: Political concerns hurt the euro but Spanish data provides some room for further optimism.

•    Rumblings of another eurozone saga are emanating out of Spanish and Italian politics, which increased safe-haven flows into the US dollar. This morning’s Spanish services PMI figure has provided an upside surprise, pointing to the smallest monthly contraction in almost two years. That said Italy’s figure couldn’t follow suit.

•    The euro is trading back up towards $1.3550. This is all just a prelude to the ECB press conference on Thursday.

STERLING/AUSTRALIAN DOLLAR: The RBA left rates on hold at 3.00% and was dovish as expected.

•    The RBA last night noted that there is further scope to cut interest rates if necessary. We do think there is a chance that the RBA will cut rates in March but this depends on how aussie data progresses in the coming weeks. Our baseline scenario is that the RBA will hold fire for the time being.

•    Sterling is trading a little higher above 1.51 and we think a move closer to 1.52 is likely from here.

STERLING/NEW ZEALAND DOLLAR: This pair benefited from a minor bounce but will not be done with the downside just yet.

•    The fact that the Reserve Bank of Australia was dovish last night highlights which out of the NZD and the AUD are likely to be preferred moving forward. Risk appetite has run out of steam a little due to concerns in Europe but we expect the NZD to maintain the initiative.

•    This pair trades at 1.8650 and fresh lows are likely to be posted in the coming sessions.

STERLING/CANADIAN DOLLAR: Support at the 1.5650 level sparked a predictable bounce, though another move lower looks likely before long.

•    Sterling was helped higher yesterday thanks to a downturn in global investor sentiment. US stocks took a major hit, as did oil prices. This morning’s strong UK PMI figure has given GBP/CAD another boost higher, which has taken the rate close to 1.58.

•    We expect momentum to be lost well short of the 1.60 mark and still prefer the CAD.

Author: Richard Driver, CaxtonFX