Nothing controversial from the chairwoman of the Federal Reserve’s testimony to Congress, the markets left unscathed. Furthermore earnings numbers yesterday were fairly decent – the boat was most definitely not rocked.


Cable (GBP/USD) appears to either be in a ‘flag’ consolidation pattern or may even have just come out of it, with the aggressive post-inflation number bounce yesterday. A flag is generally a continuation pattern, after which the prior trend (GBP/USD higher) re-asserts itself after completion. Sterling appears strong against more than just the dollar. In fact give the decline in EUR/USD over the last 24 hours, moving to 1.3550 from a 1.36 handle, the star currency pair is EUR/GBP.


EUR/GBP is making new lows and is trending very nicely indeed. Look for this to run in my view, the power of the downward thrust from resistance levels yesterday was clear, and achieving new lows just reinforces the message – sterling will continue to appreciate vs the euro. And why not? In one economy the central bank is talking about exit strategies, in the other participants talk about extraordinary tools to kick-start the economy even as the macro data stagnates.


Elsewhere, China’s Q2 GDP numbers were a slight improvement on expectations, but it didn’t help either AUD/USD or NZD/USD which have given up recent gains in fairly short order. These risk currencies bear watching. But for now I’m not sure there’s a broader narrative in play.


I had dinner with a good friend of mine who is a portfolio manager at a long term investment fund, and I took the opportunity to ask him about his current views. I’m not going to go into detail here, but he did say something very interesting. He thinks equity markets are richly valued here, but – he said – from a relative perspective, where else can you put your money? I raise the issue because if he’s thinking that, then other investors are likely to feel the same way. Bond yields are very low, so don’t present an attractive investment case; commodities have negative carry; and currencies are stymied by central bank manipulation; so for a lot of people there is simply no alternative to owning equities. Well… what does this mean for currencies generally? It looks like an environment where equities might still continue to grind higher, a kind of low volatility risk positive situation, with not a huge amount of excitement. Paying attention to the macro signals is key. Looking for the inflection points in the macro that could induce central policy changes. EUR/GBP may well be the star example of this, but surely there are others out there.