Currency Forecast - Sterling Vs. American Dollar - 26/04/2010
Britain's economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply, but recovered to end the session unchanged. This morning the pound is ticking higher as investors, having digested the growth data, decided that there's a good chance of it being revised higher for the final reading. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
It's a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed' have made a habit of stating that rates will remain low for "an extended period". Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed's warning to the market that a rate rise is on the way. Turning to growth, analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009.
Data aside, the underlying story driving the markets is of course, the general election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit. Press comment over the weekend has pointed toward other countries that have run successful coalition governments, in particular Germany, and the current strength of sterling may support that view.
The pound has also benefitted from renewed concerns over the Greek bailout. The Euro has been on the back foot even as Greece's finance minister promised over the weekend that aid will be delivered in time to stave off a potential default, but markets are unconvinced of exactly how and when funds will materialise. Greece is due to repay €11bn by the end of May in interest and refinancing costs.
Robust US manufacturing and home sales data helped to renew positive sentiment toward the global economic recovery. The US dollar has been in a holding pattern against almost all other major currencies over the last two weeks, balanced by better domestic data (which perversely tends to weaken the dollar as investors move toward higher yielding/riskier assets) and the Greek debt story which is keeping all eyes on the news wires in case the sovereign debt problems spread to countries like Spain and Portugal. Meanwhile, stock markets continue to march ever higher!
The technical outlook remains positive for sterling. We have spent a couple of weeks trading mostly above the March high at 1.5380, and seem to have established a new foothold at 1.5300 on Friday. If we can now progress above 1.5524 (the April high to date) then sterling should continue to do well. The next noteworthy resistance points are 1.5575 and then 1.5821. Clients should still take a cautious approach and consider placing stop orders below 1.5190 (based on the interbank rate). That was last week's low, and a break below there would do serious damage to the short term up trend that we've established over the last few weeks.
Currency Forecast - Sterling Vs. American Dollar - 16/04/2010
Sterling has come a long way in the last couple of weeks, capturing the key technical resistance at 1.54. As long as we don’t make a daily close back below that level we remain optimistic of further upside in the short term. US stock markets surged to their highest levels since September 2008 yesterday, the month that marked the start of the credit crisis. Investors’ willingness to take on risk tends to weaken the dollar and strengthen high yielding and riskier assets. Ironically, any positive economic data from the US only tends to reinforce that trend and result in further dollar weakness. That is exactly the opposite of what we saw during the credit crisis, when most of the bad news was emanating from the US mortgage market, and yet the dollar strengthened as frightened investors dumped high yielding assets and bought US treasury bills.
This week’s data has been a mixed basket, including manufacturing rising to a six month high, and industrial production for March falling short of expectations. Jobless claims increased, but capital inflows also increased as demand for US securities rose. The net effect has been a range bound US dollar!
News of mushroom clouds and airport chaos also had little effect on sterling, given that most European countries have been similarly impacted.
The pound was largely unchanged against the dollar after last night’s “presidential” style TV debate between the three party leaders. The clear winner was Nick Clegg of the Liberal Democrats. News snippets through the week suggested that the Tory’s lead was widening over Labour, but any swing towards the Lib’ Dem’s as a result of last night’s debate will make the election outcome less stable and increase the likelihood of a hung parliament. That theme was starting to recede earlier in the week, but is now likely to weigh on the pound again during the build up to the vote. Markets are still pricing in a Tory victory with a narrow majority, so sterling’s better mood is vulnerable to break if that view changes.
The technical outlook is positive. We’ve made a new high above 1.54 and spent the whole week consolidating those gains, which tends to skew the odds in favour of further upside. The next key technical barriers are 1.5575 (late February peak) and the more important 1.5819 level which marked the high in mid February.
Currency Forecast - Sterling Vs. American Dollar - 08/04/2010
A couple of key data items helped to sooth sterling investors last week. The UK purchasing managers index rose to the highest level since the start of the recession, and a final revision to fourth quarter GDP put growth at 0.4%, higher than originally indicated. House prices also rose 0.7% in February.
The other big story here is the imminent general election, scheduled for May 6th. There is considerable uncertainty surrounding the outcome, with a strong likelihood of the first minority government in 30 years. The pound is holding up well considering the fact that markets hate uncertainty; but this can be put down to the fact that the uncertain outcome has been well understood for some time now. Investors are growing used to this and have already acted accordingly. Setting a firm date helped, and if the polls start to swing strongly in any given direction we may even see sterling strengthen. The latest polls suggest the Tories may have extended their lead in March.
The dollar has been on the back foot recently as stock markets continue to surge to new highs (reducing the safe haven appeal of the US currency), and the Federal Reserve keeps interest rates at record lows. The minutes of the March central bank meeting increased the uncertainty surrounding the bank's timetable for future rate hikes. Official language has stated that interest rates would be held at low levels for "an extended period", a phrase which markets have interpreted as being around 6 months, meaning that any change in this phrase would equate to a "six month warning" that rates were likely to go up. However, Fed' officials rebuffed this interpretation in Tuesday's minutes, saying that they would take a dynamic and real time view on what was needed based on the inflation outlook. Markets decided that this makes no difference, and that rate hikes are still some way off.
The technical outlook is considerably better than a month ago, but sterling isn't out of the woods yet. We tested the 1.4800 level twice in March, and have now bounced back up towards the resistance at 1.5400. It's now a question of whether we can break above 1.5400 barrier. Buyers of the dollar should consider covering half of any requirement now, and taking a "wait and see" approach on the balance. A drop below 1.5000 (based on the interbank rate) would be a good time to throw in the towel!
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