Currency Forecast - Sterling Vs. Euro 29/01/10

Our view that sterling would continue to appreciate has been well vindicated by this week's rally. Last week we had weaker than expected GDP figures. The pound shrugged off that data and pushed on to new highs. Yesterday we hit another bump in the road after US credit ratings agency Standard and Poors downgraded its view on the UK banking sector, citing the UK's "weak economic environment". The credit rating on UK banking sector is now comparable with Portugal. This could be a prelude to a downgrade on the UK as a whole, a move that would have widespread repercussions for the national debt as foreign investors would demand a higher interest rate for the additional implied risk. That will not help Mr Darling's plans to "halve the deficit in four years".

On the whole we still feel that sterling is determined to rally, but we have now seen a five cent rise in just three weeks, so euro buyers should be on guard in the short term and consider covering at least half of any requirement now. Despite yesterday's turnaround the technical is still positive as long as we can hold the week's earlier low just below 1.1400.

Currency Forecast - Sterling Vs. Euro 25/01/10

Sterling finished a run of seven consecutive daily gains against the Euro last week. After rising from 1.11 to 1.15 since January 12th, we finally saw some weakness creep in on Thursday, with an acceleration in the downward movement on Friday. Whether this is the end of sterling's rally or just a correction is the million dollar question, but given the fact we are trading close to five month highs, clients with euros to buy should strongly consider covering at least half now.

Higher than expected inflation data helped sterling earlier in the week, with some rate watchers now predicting an interest rate hike as soon as April/May. On Thursday we had December's public borrowing figures which confirmed that borrowing hit record highs for the month and the year, although the figures were slightly better than market forecasts. Despite that, traders felt inclined to take risk off the table and sell sterling.

The pound has done well lately, and as we pointed out in articles over Christmas, the overwhelming negativity in the market makes it tempting to take a contrary stance and predict a continued bounce in 2010. We still feel there is a "window" for continued strength if the bank of England are able to give clear guidance as to how and when quantitative easing will end; but once that is cleared up markets will likely focus on the general election and all the uncertainty that brings. Latest opinion polls put the conservatives well ahead, and that could be helpful to sterling.

Currency Forecast - Sterling Vs. Euro 13/01/10

Last week's Bank of England meeting was a non event. The market wasn't expecting anything, and nothing happened! Hopefully we will get more from the European Central Bank meeting tomorrow. No change is expected to the 1.0% benchmark interest rate, but the accompanying statement may give an idea as to future strategy. The ECB are under no pressure to start raising rates as inflation is still way below target, and unemployment is still rising.

Good news for the pound came in the form of retail sales data for December, which showed that total sales rose 6% on the year, hitting a four year high, with food and drink being particularly strong. There are concerns however that Today's Economic Data on January 26th will show an end to the spending splurge and a resumption of the more cautious consumer behaviour we saw through most of 2009.

There are two big ongoing questions hanging over sterling. Will the BoE extend quantitative easing in February (when the current 200bn is expected to have run out), and what will be the outcome of the general election. Markets like the idea of a Tory victory because they are seen as more likely to tackle the budget deficit and help the pound.

The technical outlook remains precarious, but we are relieved to see a reaction from trend support in the last 24 hours. As we said in last week's update, sterling could do well if it can capture the 1.1320 level. On the downside we would become very concerned about the prospect of a new slide if we break below the 1.1050 level.

Currency Forecast - Sterling Vs. Euro 06/01/10

In sharp contrast to New Year 2009 when we saw massive moves in the currency markets, this year's holiday period was quiet and inactive. The pound remained within the early December range, trading between 1.1050 and 1.1290. London opened this morning at 1.1135, rallied up towards 1.1200 but has since given back those gains.

We enter the new year with the same problems that persisted through the second half of 2009. Namely, sterling's credibility is being stretched by the ballooning budget deficit and fears of a hung parliament at the general election. These stories have been in the market for some time now, and there is a wide consensus that the pound will resume its slide in 2010 after making a small gain in 2009. When a strong consensus forms in financial markets it is worth looking at the other side of the trade. In this case, the bad news could be priced in for now, and we could even see a sterling rally in the first half of the year if the euro comes under pressure due to concerns over a possible credit downgrade for Greece.

The Bank of England meet tomorrow and are widely expected to keep interest rates on hold at 0.5%, with no change to the quantitative easing package.

The technical outlook unclear, leaving everything to play for over the next few weeks. A break above 1.1320 (November's high) would open the way to further gains, while on the downside we are monitoring the 1.0930 level as our first key support.