httpvh://www.youtube.com/watch?v=C_AyAqyudrc

Not even the dovishness of the Bank of England Governor Mervyn King has been able to dissuade investors and speculators from backing the pound; something that is raising eyebrows in many a strategist’s office, not least mine.

Everything the Governor said was warning of more potential downside whether it advising against reading too much into Q2′s better-than-expected GDP growth or emphasising that the future of the inflation curve continues to look uncertain.

As soon as Mervyn King sat down sterling followed the well worn path and headed lower by as much as 0.5% against the USD and EUR. It was at this point however that, instead of seeing a new wave of selling lower, we saw market participants use the fall as a buying opportunity and drag the price higher.

These gains carried on to levels of 1.5635 for GBPUSD and GBPEUR and 1.2020. The pressure is for further sterling gains on both pairs but we think that we need to see a pop higher in GBPEUR to facilitate a move upwards in GBPUSD. At the moment the GBPEUR cross is finding it difficult to break through the 1.2020 level (0.8319 in EURGBP terms).

On an interesting note the Chief Investment Officer of the world’s largest currency hedge fund has said that today is the end of the euro rally. Most of this based on the belief of another cyclical low in the coming 8 months that drives risky assets through the floor. The article is here (H/T to Zero Hedge)

Moving into the southern hemisphere we saw an increase in interest rates from the RBNZ last night. The board decided to increase the cost of borrowing from 2.75% to 3% stating that ‘annual CPI inflation has been near 2 percent for the past five quarters. As the economy grows, inflationary pressures are expected to pick up.’

‘Given this, some further removal of monetary policy stimulus is appropriate at this stage. Even after today’s move, the level of the OCR is still very supportive of economic activity. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement’

NZD is down 0.2% against the Aussie dollar, but up 0.9% against the greenback and 0.5% against the Japanese yen.

It is the busiest day of the data calendar today starting with German unemployment at 08.55 and UK Mortgage Approvals at 09.30. We also have European Consumer Confidence at 10.00 and US Initial Jobless Claims at 13.30.