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Currency Forecast - Sterling Vs. American Dollar - 24/02/2010

Last week was one of two halves. Bad news for sterling as dreadful public borrowing figures for January were released on Thursday, compounded by weak retail sales Today's Economic Data Friday. The debt data showed a net deficit of £4.2bn in January, while analysts had been expecting a surplus. It was the first January in 17 years to show a shortfall in tax receipts over public spending.

This news flow the pound to new lows below 1.56. The move was exacerbated by a surprise decision from the US Federal Reserve to raise the discount rate from 0.5% to 0.75%. That has no effect on the benchmark Fed' funds rate, but it does give an indication that the next move will be up (not a difficult conclusion for markets to reach considering the current rate is close to zero!).

The technical outlook remains negative. After breaking below the 1.5707 level two weeks ago we have now spent time consolidating just below there, and now look ready to go lower again. Dollar buyers should take a cautious approach and hedge at least half of any requirement now to limit the risk of further downside.

Currency Forecast - Sterling Vs. American Dollar - 18/02/2010

Since breaking below the key 1.5700 level sterling has struggled to make any headway, despite the fact that stock markets have been relatively stable and investor risk appetite is improving again. Higher yielding currencies have rallied, but the dollar has also remained firm. On the data front the minutes from the last Bank of England meeting were released yesterday. All nine members voted to keep QE on hold, although some of the arguments between controlling inflation and protecting growth were finely balanced.

The pound took a new pounding this morning after data showed that the UK government borrowed a further £4.3 billion in January, a month where tax receipts usually result in a surplus. Analysts were expecting a net influx of cash into government coffers, but a 7.7% fall in tax revenues combined with a 9.7% increase in public spending meant the January account fell into the red for the first time in 17 years. The figures surprised the market, sending sterling lower across the board.

The technical outlook remains negative. Sterling had a real opportunity after briefly breaking above the key resistance zone around 1.5750 on Tuesday, but that rally has now collapsed and we are heading toward the recent lows. Buyers of the dollar should strongly consider covering any requirement at current levels, or placing a stop order to protect against a fall to new lows. We would only reconsider things if sterling can manage a close above.15800. Stranger things have happened, but right now every technical indication is that we are heading lower.

Currency Forecast - Sterling Vs. American Dollar - 11/02/2010

"The real driver of the Sterling/Dollar exchange rate right now is the stock market. The recent correction in the Dow Jones index started on January 19th, the same day that the exchange rate peaked just short of 1.65. Since then stock markets fell sharply, leading to a broad based dollar rally. Stock markets rebounded off their lows on Monday. So did the exchange rate! So for now this rate is very much dependent on what happens next in stocks, and what impact those moves have on risk sentiment." - Last week's update

Since then the stock market sold off to new lows, and so did the sterling/dollar rate. In fact, we have now broken below the key 1.5707 support level that had marked the low of the last eight months' consolidation zone. This is a major blow for the pound, and chart followers are now betting on a further decline towards 1.5000. This looks a very plausible scenario. Markets are still jittery and risk aversion is rising, driving funds away from risky currencies and into the US dollar and Yen. Ironically the pound has also been punished as investors steer clear of European currencies as a response to the well publicised debt problems facing Greece and Portugal. This seems grossly unfair, but logical given the fact that these countries represent a small part of Euro zone GDP, and the UKs deficit is also a major talking point in the markets and perhaps the next big concern.

The technical outlook is negative. Unless sterling can recapture the 1.5750 level and manage to close above there for at least two days in a row, all the evidence suggests that this market is going lower. There are no guarantees and the market can always surprise us, but considering the current outlook the best advice we can give right now is to cover any US dollar requirement as soon as possible.

Currency Forecast - Sterling Vs. American Dollar - 03/02/2010

Sterling has suffered a generalised loss of momentum over the last few days in the foreign currency markets. It started with a credit downgrade on the UK banking sector by ratings agency S&P, and a weaker than expected fourth quarter growth figure. A weak house price report from Hometrack Monday added to the pound's problems. Underlying the news flow we have a general sense of caution in the market ahead of tomorrow's Bank of England meeting, which is widely expected to result in a clear pause in the Quantitative Easing program that has seen £200bn of new money pumped into the economy.

Investors will be looking for a clear "line in the sand" to give comfort in the pound's ability to hold its value in the short/medium term. The latest inflation data showed consumer price inflation racing up to 2.9% in December, well above the BoE's 2% target, leaving the market torn between the weak growth figure (supportive of further QE) and the inflation outlook (which argues against further QE). The best outcome for sterling would be a certain pause, while keeping the door open for further action if the economic outlook deteriorates significantly. Also troubling the pound are reports that the Tory opinion poll lead is narrowing, creating increased uncertainty over the election outcome.

On the US data front there was a better than expected manufacturing survey, and last week saw a preliminary estimate of fourth quarter GDP come in at 5.7% annualised growth, compared to just 0.1% for the UK. However, the real driver of the Sterling/Dollar exchange rate right now is the stock market. The recent correction in the Dow Jones index started on January 19th, the same day that the exchange rate peaked just short of 1.65. Since then stock markets fell sharply, leading to a broad based dollar rally. Stock markets rebounded off their lows on Monday. So did the exchange rate ! So for now this rate is very much dependent on what happens next in stocks, and what impact those moves have on risk sentiment.

The technical outlook is mixed. We have once again bounced just ahead of the December low (15833) and still have key support at 1.5707, the level that has marked the low of the last eight months. If we break below there things start to look very shaky for sterling. While we continue to trade above there we still have a good chance of heading higher. Given the precarious outlook, dollar buyers should consider covering at least half of any requirement now.