Currency Forecast - Sterling Vs. American Dollar - 29/09/09
Sterling has continued its slide since last week's update. Mervyn King's comments expounding the benefits of a weak pound continue to weigh on the market, giving traders little comfort in holding the pound. In other news, commentators are speculating that the Bank of England could introduce negative interest rates on bank deposits held at the central bank.
By penalising the banks for holding large cash reserves the Bank of England would hope to stimulate bank lending and improve the pace of economic recovery. The downside for sterling however, is that such a move would likely prompt a fall in interbank interest rates (as there would no longer be an interest rate advantage to holding cash), making sterling even less attractive.
The Swedish Riksbank has already done exactly that, pushing market interest rates down to just 0.25%. Meanwhile, the US dollar has been rising slightly against the Euro, and taking advantage of sterling's weakness to rally back below the 1.60 level. We also traded below the June low yesterday (1.5802) which adds to the technical pressure building against the pound.
The US is widely perceived to be recovering at a faster pace than the UK, which is lagging. That means the Federal Reserve may remain ahead of the curve when it comes to reversing quantitative easing. We advise clients with USD requirements to cover at least half now to avoid the risk of continued downside.
Currency Forecast - Sterling Vs. American Dollar - 23/09/09
Sterling rallied this morning after the minutes of the last Bank of England meeting revealed that all nine members of the MPC voted to keep the central bank' asset purchase programme on hold at £175bn. It was the revelation that three members voted for a larger increase at last month's meeting that helped send the pound sharply lower. This morning's news has provided some relief to the pound, although it's too early to say whether this signals a sustainable reversal in the market.
The pound/dollar rate has been trading towards the lower end of its three month range, but the greenback weakened yesterday as investors continued to seek higher risk/higher yield by selling the currency and buying other assets. That trend looks set to continue as long stock markets remain buoyant.
The dollar has declined against most major currencies as a result of this trend, but sterling's extreme weakness has meant that the pound/dollar rate has been treading water rather than making any progress to the upside. The removal of near term uncertainly surrounding the Bank of England's easing programme could help sterling climb out of the ditch, but we will need to see more technical evidence before taking a decisively positive view again.
One near term signal would be sterling's ability (or otherwise) to sustain this morning's break above 1.64. That level is not only horizontal resistance (by virtue of the fact it was a major low point last week and also kept the lid on yesterday's rally) but also marks trend resistance. So a close above there today would tend to stack the odds in favour of a continued rally.
Currency Forecast - Sterling Vs. American Dollar - 10/09/09
Sterling jumped today after the Bank of England left interest rates unchanged at 0.5% and made no further increases to the quantitative easing programme. The pound has been on the back foot since last month's central bank meeting at which they raised QE from £125bn to £175bn. The minutes of that meeting showed that three of the nine strong committee actually voted for a larger increase, putting the markets on notice that further increases were likely.
More QE means more money in the system, effectively devaluing the pound against its peers. Traders reacted with relief, bidding the pound higher in the short time since the noon announcement. We will have to wait a few days for publication of the minutes of today's meeting to show how last month's 6-3 skew may have changed.
The technical outlook is improving. Having gained a foothold from the low 1.60s we are now testing resistance just above 1.66. This level has caused problems for sterling in the last month, with recently rejected highs of 1.6667, 1.6624 and 1.6607 still fresh in the minds of many traders.
A solid close above 1.66 today should put all that behind us and allow further gains toward the August highs. We advise the use of stop orders below 1.6400 in case of renewed weakness. In the meantime, let's see where this Bank of England inspired rally can take us.
Currency Forecast - Sterling Vs. American Dollar - 03/09/09
Sterling continued to ease against the dollar last week as the same problems persist. The spectre of further quantitative easing is still haunting the currency, not so much the likelihood of further increases, but the lack of information over the scale and timing of any increase. If there's one thing markets hate it is uncertainty .
The uncertainty hanging over the pound has given traders a green light to sell the currency. The dollar is also not having the best time of it as the continued rally in equity markets boosts investor confidence, resulting in a diminished appetite for the safe haven that made the greenback so popular during last year's turmoil.
Overall, the dollar is winning the battle right now. The trend is still positive for sterling over a 6 month view, but in the short term we could see weakness down to levels like 1.5984 (July's low) and 1.5802 (June's low). So the best advice we can give right now is to hedge at least half of your exposure if you are looking to buy US dollars over the next few months. Longer term the pound still has the upper hand, but as always we will keep you informed if this outlook changes.
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