Another day equals more volatility

A good start for sterling quickly turned sour as fear once again gripped the markets by the throat. A lack of action points on the Greece situation certainly did not help matters, however other factors also conspired to turn the markets away from risk. A big factor was the decision from the Chinese central bank (PBOC) that it was once again raising its reserve requirements by another 50 basis points. The decision to do this is to cool the rapid pace of credit growth in China which is unsustainable.

The monetary tightening will hurt global growth sentiment as China is the key driver for global recovery; in particular Australia will suffer. The news led to a sell off in the AUD, GBP and the EUR; the negative vibes were not helped by weak Eurozone data this morning with GDP coming in at a lame 0.1% against the expectation of 0.4% and a decline of -1.7% for Industrial Production.

Given the mood in the markets we can expect to see more selling pressure on EUR/USD and GBP/USD…later today we have US retail sales- a +0.4% is expected and a good number is need to help lift the cheer in the markets. EUR/USD at 1.35 is a key level to watch out for and if broke should enforce further downside momentum. Sterling has benefited on the weakness in the euro pushing beyond 1.15 again.