Currency Forecast - Sterling Vs. Euro 24/02/2010

Sterling slipped back to support around 1.13 last week after the Greek debt issue went quiet and the UK stepped back into the spotlight after releasing shocking public borrowing figures on Thursday, compounded by weak January retail sales on Friday. The debt data showed a net deficit of £4.2bn in January, while analysts had been expecting a surplus.

It was the first January in 17 years to show a shortfall in tax receipts over public spending. The pound fell further yesterday after Bank of England governor Meryn King gave a cautious assessment of the UK's economic recovery, making it clear that further Quantitative Easing is available should the economy need it. Those comments sent sterling sharply lower, reaffirming a general feeling in the market that the Bank of England are happy to talk the pound down in order to boost exports and reduce the trade deficit. They may have more luck there than they've had keeping the budget gap under control!

The technical outlook is mixed. The trend is still up, but if we slip below 1.13 the next obvious target would be 1.1085 (January low). We continue to advise clients to cover at least half of any Euro requirement at current levels.

Currency Forecast - Sterling Vs. Euro 18/02/2010

We were concerned about sterling's short term prospects last week as the market tested key support around 1.13. In fact, our concern was unfounded. The pound gave a strong reaction to this level, rallying back up to the 1.15 area, and has managed to spend the last few days consolidating on those gains. Much of the pound's apparent strength was in fact euro weakness as the Greek debt issue remains at the forefront of investors minds. Further reassurance for sterling came yesterday in the form of the minutes from the last Bank of England meeting. All nine members voted to keep QE on hold, although some of the arguments between controlling inflation and protecting growth were finely balanced.

Things were looking ok until Today's Economic Data this morning showed that the UK government borrowed a further £4.3 billion in January, a month where tax receipts usually result in a surplus. Analysts were expecting a net influx of cash into government coffers, but a 7.7% fall in tax revenues combined with a 9.7% increase in public spending meant the January account fell into the red for the first time in 17 years. The figures surprised the market, sending sterling lower across the board. However, we have only lost two thirds of a euro cent so far, leaving most of the last week's gains intact for now.

The medium term technical outlook (4-6 weeks) is looking better than it did last week with sterling still holding onto most of the recent gains, but short term momentum has turned negative after this morning's debt figures. We advise Euro buyers to cover at least half of any requirement here, or consider placing a stop order to protect against a further fall in the exchange rate.

Currency Forecast - Sterling Vs. Euro 11/02/2010

Sterling has had a bad few days. The continued weakness in stock markets has driven investors toward the relative safety of the US dollar. Ironically the pound has also been punished as investors steer clear of European currencies as a response to the well publicised debt problems facing Greece and Portugal. Sterling has simply been sold down like other risky currencies as traders rebalance portfolios in favour of the dollar and the Yen. This seems grossly unfair, but logical given the fact that these countries represent a small part of Euro zone GDP, and the UKs deficit is also a major talking point in the markets.

The Bank of England kept the QE programme on hold last week while leaving the door ajar for further action if required, but again the pound was in no mood to party and did not react.

We have broken below the 1.1375 level that we were citing as key support in last week's update. Trend support is just below current levels around 1.1275. A break below there would be a major blow to the already fragile outlook. Given the deterioration over the last few days we advise Euro buyers to cover at least half of any requirement now.

Currency Forecast - Sterling Vs. Euro 02/02/2010

Sterling has suffered a generalised loss of momentum over the last few days in the foreign exchange markets. It started with a credit downgrade on the UK banking sector by ratings agency S&P, and a weaker than expected fourth quarter growth figure.

A weak house price report from Hometrack Monday added to the pound's problems. Underlying the news flow we have a general sense of caution in the market ahead of tomorrow's Bank of England meeting, which is widely expected to result in a clear pause in the Quantitative Easing program that has seen £200bn of new money pumped into the economy.

Investors will be looking for a clear "line in the sand" to give comfort in the pound's ability to hold its value in the short/medium term. The latest inflation data showed consumer price inflation racing up to 2.9% in December, well above the BoE's 2% target, leaving the market torn between the weak growth figure (supportive of further QE) and the inflation outlook (which argues against further QE). The best outcome for sterling would be a certain pause, while keeping the door open for further action if the economic outlook deteriorates significantly.

Also troubling the pound are reports that the Tory opinion poll lead is narrowing, creating increased uncertainty over the election outcome.

The technical outlook remains positive as long as sterling can hold the 1.1375 support level established in late January. If we slip below there the whole rally becomes doubtful. We would still advise that clients with euro requirements consider covering half of their exposure at current levels, and take a "wait and see" approach on the balance.

 

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