Currency Forecast - Sterling Vs. Euro 26/04/2010
Britain's economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data had an immediate impact on sterling, which retreated sharply, giving back all of Thursday's gains. This morning however, the pound is ticking higher again as investors have digested the growth data and decided that there's a good chance of it being revised higher. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
Data aside, the underlying story driving the markets is of course, the election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit; but when you compare our situation with that of Europe, there is now a wide spread consensus that the UK is in a better position.
The Euro recovered some ground on Friday after Greece signalled that it would draw on the €45bn bailout package soon. This was confirmed yesterday as the Greek finance minister promised that aid from the EU and IMF would arrive in time to prevent a default. However, there is still some doubt over how and when the aid would become available from Euro zone nations, doubt which will keep investors feeling nervous about the Euro's short term prospects. In the case of the UK, the major uncertainty will at least be over next week (even if the outcome is a hung parliament!), and markets are already looking forward to that.
Stock markets rallied last week as a raft of positive US data supported the global recovery story. The FTSE is trading sharply higher this morning, boosted by the Greek bailout story, helping buoy sentiment toward the pound. Thursday's TV debate had no clear impact on the markets, only serving to underline the fact that there is no clear winner.
The technical outlook is positive. We broke above trend resistance last week but bumped into the January high at 1.1620 on Friday, retreating sharply from there. Some analysts speculated that this signalled the end of the pound's rally, but we are making some progress this morning, and if we could close above 1.1620 today it would give sterling a major boost. Given the considerable uncertainty and sterling's recent gains we continue to recommend that clients hedge at least half of any exposure at current levels, and those with appetite for risk could take a "wait and see" approach on the balance.
Currency Forecast - Sterling Vs. Euro 16/04/2010
Sterling recoiled from the trend resistance we identified in last week’s update as a rescue plan for Greece was put together over the weekend, giving the Euro an immediate boost when trading opened on Monday. Although Greece is not yet drawing upon the €45bn loan package (€30bn from Euro zone nations and €15bn from the IMF), it helps the market just to know that it’s there.
Greece will pay 5% on any debt it draws down, compared to the 8%+ it has to pay for new debt auctioned to the markets.News of mushroom clouds and airport chaos also had little effect on currency markets, given that most European countries have been similarly impacted.The pound was largely unchanged against the euro, but down against most other currencies after last night’s “presidential” style TV debate between the three party leaders.
The clear winner was Nick Clegg of the Liberal Democrats. News snippets through the week suggested that the Tory’s lead was widening over Labour, helping sterling recover some of Monday’s losses. Any swing towards the Lib’ Dem’s as a result of last night’s debate will make the election outcome less stable and increase the likelihood of a hung parliament. That theme was starting to recede earlier in the week, but is now likely to weigh on the pound again during the build up to the vote.
Markets are still pricing in a Tory victory with a narrow majority, so sterling’s better mood is vulnerable to break if that view changes.The technical view is mixed. Sterling has so far been unable to capture trend resistance, and last time we challenged these levels the market sold off back to 1.10. Given the considerable uncertainty surrounding the election we continue to advocate a strategy of hedging.
Currency Forecast - Sterling Vs. Euro 08/04/2010
In our last update we noted that the technical outlook was improving, and that sterling's apparent strength was more a case of Euro weakness. That remains the case. Proving the old adage "what goes around comes around", the pound has been able to take advantage of an embattled euro recent weeks as fears about euro credit worthiness continue to weigh on sentiment toward the single currency. Credit default swaps (which measure the market's perception of the likelihood of a debt default) for Greek national debt rose above levels for Icelandic debt for the first time yesterday, an indication of deteriorating sentiment toward the Greek debt crisis. A failed bond auction also added to those concerns. The administration needs to sell new bonds to foreign investors in order to fund their deficit. The main €5bn auction went ok, but when they tried to sell a further €1bn the market only snapped up €400m.
A couple of key data items helped to sooth sterling investors last week. The UK purchasing managers index rose to the highest level since the start of the recession, and a final revision to fourth quarter GDP put growth at 0.4%, higher than originally indicated. House prices also rose 0.7% in February.
The other big story here is the imminent general election, scheduled for May 6th. There is considerable uncertainty surrounding the outcome, with a strong likelihood of the first minority government in 30 years. The pound is holding up well considering the fact that markets hate uncertainty, but this can be put down to the fact that the uncertain outcome has been well understood for some time now. Investors are growing used to this and have already acted accordingly. Setting a firm date helped, and if the polls start to swing strongly in any given direction we may even see sterling strengthen. The latest polls suggest the Tories may have extended their lead in March.
The technical outlook is considerably better than a month ago, but we are approaching trend resistance just above 1.1450. A daily close above there would open the way to 1.1620 (the January high). In the meantime, we would like to see sterling consolidate on its recent gains and remain above 1.12, a support level that is marked by a horizontal blue line on today's chart. A break below there would increase the chances of a return to the March lows below 1.10. Clients with euro requirements should consider covering half here to capitalise on recent gains, and take a "wait and see" approach on the balance in case the pound can break above 1.15.
----------------------------------------------------------------------------------------------------------
Analysis provided by TorFX - Please follow this link for more Euro Currency Forecasts
© Future Currency Forecast.