Market Forecast - Sterling Vs. Euro - 29/09/09

Sterling declined another 2 cents since last week's special update. Mervyn King's comments expounding the benefits of a weak pound continue to weigh on the market, giving traders little comfort in holding the currency. In other news, commentators are speculating that the Bank of England could introduce negative interest rates on bank deposits held at the central bank.

By penalising the banks for holding large cash reserves the Bank of England would hope to stimulate bank lending and improve the pace of economic recovery. The downside for sterling however, is that such a move would likely prompt a fall in interbank interest rates (as there would no longer be an interest rate advantage to holding cash), making sterling even less attractive. The Swedish Riksbank has already done exactly that, pushing market interest rates down to just 0.25%.

Sterling traded below 1.08 before the London open Monday, recovering to end the session unchanged. Some analysts are predicting parity with the Euro by year end, which would mean another 8% downside in the exchange rate. The technical outlook remains negative, and the nearest noteworthy support level is around 1.05, the levels we bounced from back in January and March.

Market Forecast - Sterling Vs. Euro - 24/09/09

Sterling plunged this morning, spooked by a series of negative news reports and comments from Bank of England governor Mervyn King saying that sterling weakness was "helpful" in rebalancing the UK economy. We have been hinting at the Bank of England's implicit approval of sterling's slide for the last few weeks, and now they have come right out and said it !

The comments are extremely unhelpful for the pound, which was just starting to gain a little traction yesterday following the release of the most recent Bank of England meeting minutes which showed that all nine members voted to keep the central bank's assets purchase programme (otherwise known as quantitative easing) on hold at £175bn.

King's comments have overshadowed the relief rally that we saw yesterday, sending Sterling crashing through the key 1.10 level to a new five month low. If we fail to recover the 1.10 level today, there is every chance of a continued decline back towards the 1.0500 - 1.0550 area that marked low points in late January and March. The technical outlook is bleak, and would only be improved by a quick rebound above 1.1127 (yesterday's high).

We advise clients with Euro requirements to cover at least half now to reduce the risk of further downside.

Market Forecast - Sterling Vs. Euro - 23/09/09

Sterling rallied this morning after the minutes of the last Bank of England meeting revealed that all nine members of the MPC voted to keep the central bank' asset purchase programme on hold at £175bn. It was the revelation that three members voted for a larger increase at last month's meeting that helped send the pound sharply lower. This morning's news has provided some relief to the pound, although it's too early to say whether this signals a sustainable reversal in the market.

The Sterling/Euro rate has spent the last couple of days testing key technical support at 1.10, so a strong bounce from here could help turn the tide. However, we are still advising caution from these levels, as many analysts are once again calling for a further drop towards parity over the coming months. Clients with Euro requirements should consider placing a stop order below 1.10 (based on the interbank rate) to protect against a resumption of weakness.

Market Forecast - Sterling Vs. Euro - 16/09/09

Things were starting to look better for Sterling late last week as the latest Bank of England decision reassured investors. The lack of any further quantitative easing gave traders a reason to buy the pound for once. Unfortunately that reason was removed yesterday as Bank of England governor Mervyn King gave another gloomy update in his quarterly inflation report. Labelling the durability of the recovery as "highly uncertain", he indicated that further easing could be in the pipeline. Inflation figures for August were slightly higher than expected, but this failed to offset the comments.

Sterling has now decisively broken below key trend support at 1.14, and there is no notable support until the 1.1050 - 1.1000 area. The revival of the QE spectre is likely to continue to dog the pound leading up to the release of September's Bank of England minutes on 23rd September. We advise Euro buyers to consider covering their requirements now to avoid further downside.

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

Sterling jumped today after the Bank of England left interest rates unchanged at 0.5% and made no further increases to the quantitative easing programme. The pound has been on the back foot since last month's central bank meeting at which they raised QE from £125bn to £175bn.

The minutes of that meeting showed that three of the nine strong committee actually voted for a larger increase, putting the markets on notice that further increases were likely. More QE means more money in the system, effectively devaluing the pound against its peers. Traders reacted with relief, bidding the pound higher in the short time since the noon announcement. We will have to wait a few days for publication of the minutes of today's meeting to show how last month's 6-3 skew may have changed.

The technical outlook has been extremely precarious over the last few days as sterling tests trend support around the 1.14 level. We've actually been trading below that support today, but this afternoon's news has sparked a rally.

If the pound can build on this and capture the 1.15 level over the next few days we may see it emerging from the danger zone and getting back on the positive track that we were backing through the second quarter. In the meantime, we advise clients to consider using stop orders beneath the recent lows to protect against renewed weakness.

Market Forecast - Sterling Vs. Euro - 03/09/09

Sterling started last week badly by breaking below the key 1.15 support. Things got worse from there as we trundled lower through the week, eventually finding a foothold at trend support around 1.1325. The spectre of further quantitative easing is still hanging over the pound, giving traders a green light to sell the currency.

Data flow was also unsupportive, with a small upward revision in second quarter growth (up to - 0.7% from original estimate of -0.8%) being more than offset by better growth data from Europe which showed economic expansion for France and Germany over the same period. Comparatively speaking that leaves the UK clearly lagging, and that is being reflected in the Sterling/Euro exchange rate.

The technical outlook remains negative, and a further downside appears the most likely course. We have found support at current levels, but we won't be comfortable unless the pound can recapture the 1.15 level. Meanwhile, a break below trend support and last week's 1.1325 lows would signal a likely move towards the next support at 1.1075 / 1.1020. Clients should strongly consider covering any exposure here to avoid further downside.

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