Market Forecast - Sterling Vs. Euro - 25/08/09

Sterling dropped below key technical support at 1.15 yesterday. That's bad news. It looks like the sterling's New Year resolution to "do better" has finally hit the rocks. We've been very cautious in recent updates, but that caution is now turning to alarm. The next noteworthy support is around 1.13.

Last week started in positive mood, with a good bounce on Tuesday as inflation figures beat expectations, raising the prospect of a possible interest rate rise in a few months time. That spurred some buying of the pound, but it was short lived as Wednesday's release of the Bank of England minutes showed the nine member committee flirted with the idea of a larger increase in quantitative easing than the £50bn announced. That has left a cloud hanging over the market as traders anticipate possible further increases next month of beyond. Right now that cloud means that investors are avoiding the pound, which could result in continued weakness.

We advise clients with Euro requirements to cover at least half now to avoid the very real danger of a new Sterling slump.

Market Forecast - Sterling Vs. Euro - 19/08/09

We adopted a cautious tone last week after sterling started to look shaky following the Bank of England decision to extend quantitative easing ("QE") measures. The pound subsequently fell 1.5 euro cents to 1.1565 by Friday, then bounced yesterday after a stronger than expected inflation report. Here's what TorFX head of trading Adam Solomon had to say about that in this morning's daily insight.

"The UK inflation rate unexpectedly held steady at 1.8% in July, as consumer prices rose and provided some initial optimism that the economy is staving off the threat of deflation. The annual gain in consumer prices was the same in June, the lowest level since September 2007. On the month, prices stayed unchanged, compared with initial estimates of 0.3% drop"

The bounce was short lived though after this morning's release of the minutes from the recent Bank of England meeting. Only six of the nine member committee voted for a £50bn increase in QE, with the other three (including influential Bank of England governor Mervyn King) voting for a larger £75bn increase. That puts the markets on notice that further easing may be in the pipeline, casting an ominous cloud over sterling. In extending help to the economy, the Bank of England are inevitably and perhaps deliberately denting the pound. A weaker pound helps narrow the gap between imports and exports as UK goods become cheaper to foreign buyers.

It looks like the path of least resistance in the short term is down. The much tested 1.15 level may come under pressure again over the coming days. Clients with Euro requirements should cover at least half now.

Market Forecast - Sterling Vs. Euro - 10/08/09

Things were looking rosy for sterling at the start of last week, but doubt was starting to creep in after we made a few failed attempts at capturing the 1.18 level. On Thursday that doubt turned into a full scale dash for the exit as the Bank of England announced an increase in quantitative easing from £125bn already spent, up to £175bn, and extra £50bn of spending. Most economists are welcoming the move, but that doesn't help the pound, which fell as soon as the announcement hit the news wires.

The shadow monetary policy committee had previously recommended extending the programme by "between £75bn - £300bn", but most market watchers expected the Bank of England to simply release the £25bn balance that they still had in the pot.
The technical outlook for sterling has deteriorated. We have maintained a positive bias for the last few weeks, and were encouraged by the bounce from the 1.1500 level, but the outlook is now looking shaky. We need to overcome last week's highs (1.1822) to shake off the technical cloud cast by the Bank of England inspired sell off. We advise clients with Euro requirements to cover half here while the rate is still close to the recent highs, and then take a "wait and see" approach over the next few days.

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