Currency Forecast - Sterling Vs. American Dollar - 19/08/09
We adopted a cautious tone last week after sterling started to look shaky following the Bank of England decision to extend quantitative easing ("QE") measures. We were concerned that a break of trend support could lead to further technical selling of the pound, and that has proven to be the case with a further 3 cent slide since last week's report. Things seemed to be picking up yesterday after a stronger than expected inflation figure. Here's what TorFX head of trading Adam Solomon had to say about that in this morning's daily insight.
"The UK inflation rate unexpectedly held steady at 1.8% in July, as consumer prices rose and provided some initial optimism that the economy is staving off the threat of deflation. The annual gain in consumer prices was the same in June, the lowest level since September 2007. On the month, prices stayed unchanged, compared with initial estimates of 0.3% drop"
The bounce was shattered this morning by the release of the minutes from the recent Bank of England meeting. Only six of the nine member committee voted for a £50bn increase in QE, with the other three (including influential Bank of England governor Mervyn King) voting for a larger £75bn increase. That puts the markets on notice that further easing may be in the pipeline, casting an ominous cloud over sterling. In extending help to the economy, the Bank of England are inevitably and perhaps deliberately denting the pound. A weaker pound helps narrow the gap between imports and exports as UK goods become cheaper to foreign buyers.
The technical outlook has deteriorated since the break of trend support last week, but so far the support around 1.63 has held. Our current view is that dollar buyers should reduce risk by covering at least half of any requirement now.
Currency Forecast - Sterling Vs. American Dollar - 10/08/09
Things were looking rosy for sterling at the start of last week as sterling surged higher on Monday against a broadly weaker US dollar. The greenback has been under pressure as rising stock markets and subsiding investors risk aversion has resulted in a flow of funds out of the dollar and into riskier, higher yielding assets. On Thursday though, the Bank of England derailed sterling's rally as it announced an increase in quantitative easing from £125bn already spent, up to £175bn, and extra £50bn of spending. Most economists are welcoming the move, but that doesn't help the pound, which fell as soon as the announcement hit the news wires.
The shadow monetary policy committee had previously recommended extending the programme by "between £75bn - £300bn", but most market watchers expected the Bank of England to simply release the £25bn balance that they still had in the pot.
This leaves the rally in tatters for the time being, and bigger questions will be raised if sterling falls below key trend support at 1.6550. The next major support below there is 1.5984 (July low) and 1.5802 (June low), so this week will be a crucial test from a technical perspective.
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