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Currency Forecast - Sterling Vs. American Dollar - 25/01/10

Sterling was doing pretty well against most currencies last week, but the dollar retained the upper hand as stock markets plunged. As always, when things get scary, the scared buy US dollars !

Higher than expected inflation data helped sterling earlier in the week, with some rate watchers now predicting an interest rate hike as soon as April/May. On Thursday we had December's public borrowing figures which confirmed that borrowing hit record highs for the month and the year, although the figures were slightly better than market forecasts. Despite that, traders felt inclined to take risk off the table and sell sterling.

The technical outlook is negative. Having topped out ahead of 1.65 last week we are now heading back to the bottom of the trading range around 1.58. If we break below there it would be bad news for the pound.

Currency Forecast - Sterling Vs. American Dollar - 13/01/10

Last week's Bank of England meeting was a non event. The market wasn't expecting anything, and nothing happened! Hopefully we will get more from the European Central Bank meeting tomorrow. No change is expected to the 1.0% benchmark interest rate, but the accompanying statement may give an idea as to future strategy. The ECB are under no pressure to start raising rates as inflation is still way below target, and unemployment is still rising. The next US Federal Reserve meeting is on January 27th, with interest rates forecast to remain at record lows of 0.25%.

The main data item from the US so far this year was the closely watched "non farm payroll", or jobs report. In December the dollar rallied after the report unexpectedly showed a net gain in jobs, but the small gain was more than reversed when the January figure was announced last Friday. The dollar has been on the back foot since then, losing around 2% against sterling.

Good news for the pound came in the form of retail sales data for December, which showed that total sales rose 6% on the year, hitting a four year high, with food and drink being particularly strong. There are concerns however that Today's Economic Data on January 26th will show an end to the spending splurge and a resumption of the more cautious consumer behaviour we saw through most of 2009.

There are two big ongoing questions hanging over sterling. Will the BoE extend quantitative easing in February (when the current £200bn is expected to have run out), and what will be the outcome of the general election. Markets like the idea of a Tory victory because they are seen as more likely to tackle the budget deficit and thus help the pound.

For the dollar's part, the big question is whether the liquidity driven stock market rally will continue in 2010. Surging stock markets have prompted renewed risk appetite among investors, who've been selling the dollar and buying riskier assets in the latter half of 2009. A stock market wobble is usually good for the greenback.

The technical outlook is still positive for sterling. In recent reports we pointed to the October low at 1.5707 as holding the key for the pound. A break below there would do major damage to the longer term uptrend, so conversely, by defending that level sterling is giving itself a good chance of returning to the top of the trading range (1.6880 - 1.7040) over the next few weeks. We are cautiously optimistic based on the last few days' price action.

Currency Forecast - Sterling Vs. American Dollar - 06/01/10

The pound tested eight week lows over the holiday period, touching 1.5850 and rebounding to 1.6250 earlier this week.

We enter the new year with the same problems that persisted through the second half of 2009. Namely, sterling's credibility is being stretched by the ballooning budget deficit and fears of a hung parliament at the general election. For the dollar's part, the currency weakened through much of 2009 as investor risk appetite increased leading to funds being moved out of the safe haven of the greenback and into higher yielding currencies like the Aussie dollar. That trend has allowed sterling to hold its ground against USD over the last few months, leaving everything to play for in 2010. If the nine month old stock market rally falters, we would expect the dollar to benefit, but as long as stocks keep going up, sterling has a good chance of holding its own or even making further gains.

The Bank of England meet tomorrow and are widely expected to keep interest rates on hold at 0.5%, with no change to the quantitative easing package.

The technical outlook is still positive for sterling, because the last few months have been spent in a consolidation pattern after the strong gains in the second quarter of 2009. That means the trend is still positive, at least while we continue to trade above 1.5707, the October low.