Home Forex Analysis And Forecasts EUR: No Change In Trend; GBP: A Buy On Dips - Credit...

EUR: No Change In Trend; GBP: A Buy On Dips – Credit Agricole

Risk sentiment has been improving of late, mainly on the back of Greece’s new government softening its stance on the subject of additional debt write-downs.

However, we remain of the view that any potential setback with respect to Greece is unlikely to make a case for sustainably rising risk aversion. On the contrary, firm liquidity expectations, as driven by the ECB’s aggressive monetary policy stance and still well supported US growth expectations should keep risk appetite, as reflected in advancing global equities, supported. When it comes to EUR/USD, however, we remain of the view that the latest upside is a correction rather than a change in trend.

The GBP has been stabilising of late, mainly on the back of improving risk sentiment and limited risk of investors’ BoE monetary policy expectations falling further. According to the latest data, both manufacturing- and construction-sector-related business activity has improved of late.

However, investors’ main focus will be on today’s January services PMI, which will provide a better indication of conditions in the domestic economy as a whole. Broadly in line with market expectations, we expect the sevices sector to continue expanding at a healthy pace. If so, rising domestic demand conditions should keep inflation expectations stable, to the benefit of further stabilising central-bank interestrate expectations.

Under such conditions we expect the GBP to remain a buy on dips, also against the EUR. Although the cross has been correcting higher of late, additional room for diverging BoE–ECB monetary policy expectations should keep the medium-term downtrend intact.

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