Market Forecast - Sterling Vs. Euro - 30/11/09
Markets were sent reeling last week after the Dubai government announced that its investment vehicle Dubai World is requesting a standstill agreement with its creditors. The diversified holding company has debts of $59bn, but the immediate concern is a $3.5bn bond due to mature in December. By seeking to vary the terms of repayments Dubai is probably defaulting on its debts, a situation that has uncertain ramifications for investment worldwide. The initial reaction in the markets was panic, sending the FTSE 100 index down over 3%. Needless to say, most of the major British banks are lenders to Dubai World. US markets were closed yesterday for Thanksgiving, but were trading 2% lower this afternoon.
The impact on the currency markets has also been fairly predictable. Just like last year's turmoil, this shock has sent traders scurrying for the apparent safe haven of the US dollar and the Yen. Sterling slipped 4 cents against the dollar since yesterday but we have seen some rebound this afternoon as stock markets stabilised. Oil and gold also fell, partly as a reaction to the stronger dollar, but also because traders are taking their profits off the table in a general move towards de-risking portfolios.
The sterling/euro rate has been relatively unaffected as the main focus has been on a general move towards the dollar. In our last update we were positive on the short term prospects for the exchange rate, saying that as long as it continues to trade above 1.10 things were looking good. Since then the situation has deteriorated and we've seen a seven day losing streak that puts us right around that 1.10 level. That leaves sterling on a precarious slope unless it can manage a swift rebound from current levels. Below 1.10 the next likely support is 1.0825, and then 1.0630. Today's 12 month chart shows that it is still very much a matter for debate whether sterling has done enough to end the downtrend that dominated through 2007/2008. We saw an encouraging reaction in October, but the pound needs to develop that rebound further by taking out the recent 1.1320 high before we can safely target loftier levels like 1.1500 and 1.1730.
Market Forecast - Sterling Vs. Euro - 16/11/09
Last Wednesday's quarterly inflation report put sterling on the back foot, sending it reeling down towards the key 1.10 level. It wasn't so much the data that hurt, since we already knew that inflation had declined to just 1.1% in September.
Gloomy comments by governorMervyn Kingkept markets guessing over whether further quantitative easing is in the pipeline. "We have a completely open mind as to whether to do more asset purchases..." was the phrase that sterling didn't like. However, by Thursday the pound was bouncing back as the wider market decided that the comments were designed to avoid any further disappointment should the bank chose to extend the QE programme. That could be symptomatic of the general sterling trend lately.
An initial kneejerk reaction to bad news/comment seems to be followed by a swift rebound. As we've said before in these updates, "what should go down and doesn't go down can only go up". That's just a common market proverb and we shouldn't be unduly optimistic; but like all proverbs, it does carry some truth, and we would not be surprised to see sterling continue to rally if we can vault the 1.1235 highs set last week.
The technical outlook remains positive as long as we continue to trade above 1.10. That was a key resistance level back in late September and mid October, and is now working as support. A break above 1.1235 would open the way for further gains, with the next key barrier being the 1.1485 level that marked the September high.
Market Forecast - Sterling Vs. Euro - 02/11/09
Sterling was marching steadily higher through mid October until we hit a major stumbling block on Friday 23rd. Third quarter growth figures didn't show any growth at all. In fact the economy contracted by 0.4% instead of the 0.2% expansion that analysts were expecting. That prompted a vicious sell off, sending the pound two cents lower almost immediately.
Last week was somewhat better as the stock markets finally entered correction territory, sending investors scurrying away from high yield currencies and into more defensive plays including the dollar and pound. By Thursday/Friday the previous week's growth shocker was looking more like a blip as sterling rose to new six week highs against the euro. Much now depends on the Bank of England meeting this Thursday (November 5th).
It seems to have come around very quickly after they elected to keep interest rates and quantitative easing on hold in October. Another "no change" vote would certainly help sterling's cause this week, especially if the subsequent meeting minutes (usually released a few days later) show another 9-0 vote.
The short term technical outlook is positive despite today's weakness. Overcoming the growth data blip was a major development from a sentiment viewpoint, showing that the market is paying less attention to negative newsflow. "What should go down and doesn't go down can only go up" is a favourite market proverb that fits the picture. However, there can be no guarantee that sterling will continue to rise, and the best advice we can offer is to cover half of any euro requirement now, and take a "wait and see" approach on the balance.
If you are selling euros, you may want to consider covering your trade now to avoid the risk of further upside in the exchange rate. We are still trading relatively close to the lows, and the risk appears to be to the upside in the short term.
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