Currency Forecast - Sterling Vs. Euro 25/03/2010

Sterling has escaped further downside against the Euro this week, but this is largely due to the European currency taking the worst of the flack after a credit rating downgrade for Portugal, and continuing worries over who will come to the rescue of Greece, and market chatter about future problems in Spain. A dip in inflation helped to confirm the Bank of England's view on price stability, but it doesn't do anything for interest rate expectations.

The budget (or should we say the pre election budget, for there is certainly more to come once the election is out of the way!) delivered no market moving surprises, but did remove at least some of the short term uncertainly hanging over the pound. Nevertheless, sterling fell to a two week low against the dollar and other currencies, while the real focus was on the Euro, which posted sharp losses across the board.

Looking further out, once the budget settled we still see a negative trend for sterling. The fact that Spanish national debt is yielding 3.82% versus 3.97% for sterling 10 year debt indicated that even after this week's heightened fears over the state of the euro zone economies, investors still demand a higher return on UK debt because they view it as a higher risk!

The technical outlook is actually improving. If we could make a daily close above 1.12, that would help cement at least a short term low, and open the way to level like 1.1325 and then 1.1547 (February high). That said, a new slump below trend support at 1.10 would be a major blow and suggest a new slide is on the cards. Do not think that the pound is strong. It is merely stronger than the Euro right now, which is extremely weak! As long as the Euro remains under pressure (which is mainly driven by fears over sovereign credit ratings) the exchange rate has a chance to drift higher.

Currency Forecast - Sterling Vs. Euro 19/03/2010

What a difference a week has made. We challenged the March 1st lows towards the end of last week concerns over the unexpectedly large January trade deficit and weak manufacturing data; but the Euro lost traction, even after Germany revealed a surprisingly large trade surplus, despite the strength of the Euro which would tend to undermine demand for Euro priced products.

The Greece situation still rumbles on, with no clarity yet as to how the massive hole in the government's finances will be filled. However, the fact that there were no new blows at least allowed investors to take a sanguine view of affairs and ignore the problem for a few days.

Sterling has made some encouraging gains over the last few days, helped in part by lower than expected February budget deficit figures which were released yesterday. The data showed a deficit of £12.35bn, lower than the £14.75bn figure that analysts were expecting. The pound also drew support from market chatter about a possible acquisition of BG Group by Exxon Mobile; a transaction which would require the purchase of a large amount of sterling.

From desperate levels the pound has managed to stage a turnaround. The major problems persist; namely the uncertain election outcome, a high twin deficit (although the budget side was slightly improved from terrible January figures) and persistent talk of a potential credit downgrade for the UK. In the short term, sterling is being squeezed higher on a largely technical basis. We have bounced from key trend support, and the market is unwinding an excessively "oversold" position, helped by a short squeeze as investors who sold the pound betting on further falls during the panic two weeks ago are now buying back to cover their positions.

Whether the medium term fundamentals will support a continued rally is largely guesswork. At the moment we at least have a clear short term floor in place at 1.0930, and buyers of the Euro can use this as a useful reference point. If we slide below that level clients should immediately cover all euro requirements. In the meantime, we would advise taking advantage of the bounce by covering half of any requirement now, and taking a "wait and see" approach on the balance.

Currency Forecast - Sterling Vs. Euro 10/03/2010

A successful government gilt auction helped sterling recovery its poise last Tuesday after a Monday which saw the currency slide over two cents against the Euro. The fact that investors are still happy to buy gilts (most of the demand was from pension funds and insurance companies) is reassuring, especially as buyers were bidding for twice the amount of stock than was on offer. That level of cover contrasts well with the March 2009 auction in which the government only sold £1.63bn of a £1.75bn offer, the first auction failure in 14 years. Another auction for £3bn of 2022 debt went well yesterday, achieving 2.01 times cover, but this was eclipsed by two other news items. Firstly the latest international trade figures which showed Britain's trade deficit reaching £8bn in January, far higher than analyst expectations. This comes despite the weak pound, which should boost demand for British exports. That demand is crimped however by the weak state of the European economy, out main trading partner. This was the sharpest fall in exports since 2006.

Another blow came in the form of a report from credit ratings agency Fitch, who yesterday labelled Labour's promise to cut the deficit in half by 2015 as "too slow". This sort of report only helps to recycle the persistent speculation of a possible cut in the UK's credit rating; and is very unhelpful to an already embattled pound.

The technical outlook for sterling is still very precarious. The recovery off last week's lows looks like a correction, with new lows likely to be just around the corner. Memories of last Monday's "collapse" are still fresh, and as we head back towards those lows investors could become nervous and skittish. Buyers of the Euro should cover any requirement now to avoid the risk of a new sell off.

Currency Forecast - Sterling Vs. Euro 02/03/2010

Sterling had already lost two cents last week, and promptly lost another two when things got nasty yesterday. Not a good start to the week! A weekend poll showing a high probability of a hung parliament set the scene for a bad week, but it was no one factor that triggered the big slide. Another contributor was Prudential's announcement that it will purchase AIG's Asian life insurance business. That will require the sale of a large amount of sterling to fund the ?35bn price tag. Markets were also spooked by news items concerning Iran's failure to cooperate with nuclear watchdogs the IAEA. Sentiment toward the pound has been deteriorating sharply in recent weeks, and any one of these news items were excuse enough to cause a stampede for the exit. An apparent improvement in manufacturing activity was completely ignored, and mixed mortgage data did nothing to contribute.

The pound recovered some of the lost ground (at one point it was trading nearly 3 cents lower on the day) but not enough to suggest a reversal. Things are looking very precarious as we slide towards key trend support at 1.0850. Below there we have the October low at 1.0625 as the next important reference point. Buyers of the Euro should strongly consider covering most of your exposure here to avoid being at the mercy of what looks like a very dangerous market.

 

 

 

 

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