Pound Punches Past 1.50

 | Jan 26, 2015 12:41PM ET

The pound has posted gains on Monday and is back above the 1.50 level. In the North American session, GBP/USD is trading in the mid-1.50 range. It’s a quiet day on the release front, with no events out of the UK or the US. On Tuesday, we’ll get a look at British Preliminary GDP as well as several key US indicators.

Greeks went to the polls on Sunday, and the far-left Syriza party emerged victorious. Syriza ran on a platform of ending the crushing austerity scheme which Greeks have endured as part of the €240 billion bailout negotiated between and the EU, ECB and IMF. Predictably, the euro fell after the election results but has since stabilized, gaining over 100 points on Monday. Syriza’s win certainly throws a monkey wrench into the Greek bailout program, but the new Greek government is likely to negotiate a deal with Greece’s creditors. A Greek exit from the Eurozone may make for interesting headlines, but such a scenario is considered unlikely. Indeed, Greek Prime Minister-elect Alexis Tsipras has promised to keep Greece in the Eurozone. Still, there remains plenty of uncertainty as to what will happen with the bailout plan, so traders can expect events in Athens to have a strong impact on the currency markets.

British Retail Sales, a key indicator, posted a gain of 0.4%, beating the estimate of -0.6%. On Wednesday, there was good news on the UK employment front, which has consistently been a bright spot in the British economy. Claimant Count Change dropped by 29.7 thousand, easily beating the forecast of -24.2 thousand. The unemployment rate followed suit and dropped from 5.9% to 5.8%. There was an important shift in the BOE voting pattern on the previous interest rate decision, with a unanimous (9-0) vote to maintain rates at their current level of 0.50%. This marked a change from recent votes, in which two members had voted in favor of raising rates. The unanimous decision reflects the “new order” in which the UK and other industrialized countries must deal with rapidly falling inflation, due in large part to oil prices which have fallen by 50% since the summer. This has eased pressure on the BOE to raise interest rates, a move which would boost the pound.

The markets had expected the ECB to pull the QE trigger on Thursday, but Mario Draghi has often underwhelmed in his monetary moves, so a QE package worth €1 trillion sent the euro reeling against the US dollar. The QE scheme will see the ECB purchase €60 billion each month, commencing in March and scheduled to last until late 2016. The ECB has been under increasing pressure to combat deflation in the Eurozone, as underscored by a December inflation reading of -0.2%. In remarks on Thursday, Draghi acknowledged that ECB efforts to fight deflation had been insufficient. Thursday’s dramatic move demonstrates a strong determination by the ECB to “take the bull by its horns” in the battle to bolster inflation and kick-start the ailing Eurozone economy.

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