The pound has come back into focus at the start of the week after last week’s surprise announcement of further asset purchases by the Bank of England. Monday’s fall in sterling was in part due to MPC policymakers suggesting that the extra £75bn of QE announced last week could well be the start of a much bigger program of asset purchases.
Yesterday morning’s UK Manufacturing Production data showed a monthly contraction of 0.3 per cent in British manufacturing output between July and August, providing more bad news for the UK economy. If today’s UK Jobless Claims change figure provides further evidence that the slowdown in the UK economy is picking up pace, then sterling could endure a limp finish to the trading week. Sterling-dollar is in a downtrend from the $1.6618 high set back in August. The recent highs at $1.5690 was a test of the resistance area around previous highs, so the outlook is for a move to the downside off of this level.
However, we certainly cannot ignore the importance of the Eurozone crisis and with uncertainty continuing to grip the world, big swings are of course not out of the question. Sterling is likely to look weak across the board as fears that the UK’s slump is accelerating.
It seems that sterling is currently holding the title of the ugliest of the ugly sisters.
Sterling and the euro will continue to form similar patterns against the dollar as the debt crisis intensifies and hurts growth in two of the UK’s largest trading partners: France and Germany. Euro-sterling will continue to be volatile because of both currencies being heavily affected by the debt crisis. Although this erratic price action is likely to continue on in the bearish channel pattern, which has been in evidence since July, being long sterling against the euro is potentially a good trade for the risk-tolerant investor.
Sterling-dollar has depreciated significantly over the past two weeks due to the dollar being the only perceived currency safe haven since the Swiss National Bank and Bank of Japan intervened to debase their currencies. This has probably been overdone and now looks like a good long opportunity in some people’s eyes. It could be argued that the dollar will eventually lose its appeal as the Fed is forced to increase money supply to spur growth and as the Chinese continue to sell their dollar holdings to diversify their foreign reserve portfolio.
If the debt crisis is resolved then there will be even more reason to sell the dollar. A timely way to buy sterling-dollar may be to wait for the pair to come off a couple of cents to around the $1.5300 level and then turn again to form a triple bottom. This would be a strong trend reversal and a possible opportunity to maximise profits for bulls.
Last month’s insatiable thirst for the dollar provided some cover for the pound, and in relative terms it was one of the better-performing currencies. However, now that Europe’s leaders finally understand that they risk global contagion if they do not resolve their differences over the sovereign debt and banking crisis very quickly, the single currency is enjoying some respite and the pound is on the back foot. This should not be particularly surprising, as the fundamentals for the pound are still very challenging. The economy is flirting with recession, with the consumer in full retreat as a result of the continuing squeeze on real incomes. The latest BRC like-for-like sales figures provide further confirmation that retail spending remains in the doldrums.
Euro-sterling, which briefly traded below £0.86 on the first day of the new week, jumped above £0.87 on Tuesday and seems poised to go higher. Should Europe actually deliver on a decent plan over the coming weeks (you never know, they might surprise us), then it is likely that the pound would underperform the single currency. Cable’s recovery over the past week has been sluggish, no doubt in large part because of the significant short-covering being undertaken in the euro. Still, cable bulls will be encouraged by the fact that on two separate occasions in the past two weeks it has tested and bounced away from the low of last December. Even so, the pound remains a currency with very few committed friends these days.
Since the beginning of this year I have not expected anything in the way of any major surprises for sterling, particularly against the US dollar. We have had the odd impressive move along the way, with sterling-dollar trading as high as $1.6700 in April, but at current levels it is back to where it started the year. It’s a fairly similar story when we look at euro-sterling – the current rate is not a million miles away from this time last year.
From a trading point of view there is plenty of day-to-day volatility to take advantage of – of course with this year’s Eurozone crisis there have been plenty of significant swings and medium term trends. But from a longer term point of view there are no signs of any significant shifts that are obvious to me at the moment. All three economies have their own problems and if the Eurozone crisis continues to drag, this is probably going to weigh on the pound too, as investors see the US dollar as the safe bet. But the $1.5300 level has been a real line in the sand for sterling-dollar over the past 14 months and it would take a break through here to really start worrying about a run of sustained sterling weakness.
For now, until we see some sort of steady economic growth, or some move on interest rates, or even more expanded quantitative easing from the Bank of England, it would not surprise me if in six months time we are talking about the pound at pretty much the same levels in the forex market that we are at today.