Sterling bulls shouldn’t charge before they look

DESPITE last week’s stronger than expected UK macroeconomic data suggesting that the economy was in a better state heading into the second half of the year, the outlook remains mixed for the pound against its dollar and euro pairs. While a position against the common currency remains the best way for sterling bulls to profit, risk-off markets have made gains against the dollar heavy going.

With manufacturing, services and construction PMIs for March beating expectations, sterling has been given a more solid foundation, at the same time as taking the bite out of some of the more bearish stances taken by analysts on the UK economy. It is hoped that as we head towards the second half of the year, the Diamond Jubilee and Olympic Games will further bolster the domestic economy – as a result leading to a less dovish Bank of England.

The euro came under heavy pressure yesterday as the European Central Bank’s (ECB) Long-Term Refinancing Operation (LTRO) appeared to be doing little to ease credit contraction in the Eurozone periphery nations. The head of Spain’s central bank, Miguel Angel Fernandez Ordonez, did nothing to assuage these fears by announcing that the country would require further capital injections should economic conditions deteriorate further. With banks already swamped by a deluge of defaults when the property market sank, Spain faces its second recession in two years. “As the ECB’s LTROs appear to be having limited impact in addressing the debt crisis, president Mario Draghi may look to target the benchmark interest rate,” says David Song, currency analyst at Daily FX. “The governing council may have little choice but to carry out its easing cycle throughout the year as the governments operating under the single currency become increasingly reliant on monetary support.”

According to Ian O’Sullivan, head of marketing at SpreadCo: “If you look at sterling versus the dollar it has barely moved in 10 weeks, trading in a 300-pip range around $1.5800, the 150-day exponential moving average, since 1 February.” O’Sullivan adds: “Cable does have strong resistance up above but has been posting higher highs over the past two months and may be due for another run towards $1.600 should we get another bout of dollar weakness.” With the quarterly Bank of England Monetary Policy Committee (MPC) inflation report coming up, it will be interesting to see if there is a shift in the MPC policy that can lift cable out of this trading range. In short, sterling bulls need to be selective rather than charging in to trade.