Currency Forecast - Sterling Vs. Euro 18/08/2010

Sterling has been creeping back towards the June highs over the last few weeks after finding support from a key technical trend line (marked in blue on today’s chart). A setback came yesterday after data confirmed a widely expected moderation in consumer price inflation. The figure came in at 3.1% for July, down slightly from 3.2% in June. Technical factors were also blamed for yesterday’s weakness after the Pound broke major support levels against the US dollar, leading to broader based selling.

The Pound is trying to put best foot forward this morning after the minutes from the latest Bank of England meeting showed that the nine strong committee voted 8-1 in favour of no change in interest rates. The lone voice for a rate hike was Andrew Sentance, who has voted for tightening at the last few meetings. Investors will be mildly reassured that Sentance is sticking to his guns after a run of weak data on the housing market, and the slowing inflation outlook contributed to a general feeling that we are sliding toward a double dip.

The technical outlook is mixed. Sterling has moved out of the danger zone by putting in three weeks of moderate gains, but buyers of the Euro should consider placing a stop order behind the market in case the trend reverses.

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Currency Forecast - Sterling Vs. Euro 09/08/2010

There was a clear lack of direction last week, demonstrated by the fact that Sterling traded within in a one cent range between 1.20 and 1.21. A background of buoyant investor risk appetite has been helping sterling lately, but with interest rates still on hold at 0.5% there is little investment case in buying the Pound. The Bank of England held rates steady again last week, and we will have to await publication of the meeting minutes (9:30am on Wednesday August 18th) to see if there has been any shift in the 8-1 “no change” vote. The monetary policy committee are likely to stick to a cautious tack in the short term as economists closely monitor economic statistics for any perceptible reaction to government budget cuts. As if to underline the anticipated effect of the cuts, data released on Friday showed a 0.5% decline in industrial production in June, compared to an expected rise of 0.2%. The market was also disappointed with a smaller than expected 0.3% rise in manufacturing output. Despite Sterling’s tentative progress over recent weeks the spectre of a “double dip” still looms large in investors’ minds. As long as stocks are rising and the Pound is firm, traders are willing to continue to buy into the recovery theory, but it would only take a few bad news items to damage confidence and send the Pound reeling.

The technical outlook is precarious. We are still in an uptrend, and July’s bounce from trend support is good news. However, there is very little momentum behind this latest rally, and we would like to see Sterling capture 1.2180 (the early June high) to give us confidence that we are heading back to the 1.2390 highs. A break below trend support at 1.1900 would be bad news, with a break of the July low (1.1720) giving Sterling a major headache. Clients with Euro requirements should consider hedging at least half of any exposure now.

Key data from the UK this week includes trade balance data at 08:30 on Tuesday, and the Bank of England’s quarterly inflation report at 09:30 on Wednesday.

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