by Jon Beddell
Foreign Currency Market Update – GBP / CAD Update
Last Wednesday was a big day for Sterling. It started with the publication of the minutes of the latest Bank of England meeting. They revealed a 3 way split in voting among the nine strong committee, with one member voting for an interest rate hike, one voting for further Quantitative Easing, and the rest sitting on the fence. Governor Mervyn King is somewhere between a rock and a hard place. The BoE’s mandate is to contain inflation in the medium term by raising interest rates to combat price rises, but rate hikes in the face of the new budget cuts would be a little hasty. All in all, the wait and see approach looks best. Then, setting the scene for the long awaited comprehensive spending review, was confirmation that the budget deficit hit a record high in September. The government borrowed £16.2bn in the month, the highest since modern records began. The day’s main event was the long awaited Comprehensive Spending Review. The announced spending cuts were largely in line with expectations, and the general consensus is that the government have taken drastic but unavoidable action, and that the BoE need to sit on their hands or be ready to provide QE if heroic measures are required to resuscitate the economy. The case for action may be building as retail sales for September came in well below forecasts, with a drop of 0.2% on the month, as well as a downward revision to the August figure.
While Sterling has been languishing against the Euro and Australian dollar, it’s been holding its ground against both the US and Canadian units. The main theme driving Sterling’s apparent gravity defying performance is risk appetite. Investors have been selling the US dollar and buying higher yielding currencies and those that carry higher risk and potentially higher rewards. Although the main beneficiaries of such a move are the Aussie dollar and Rand, Sterling has rallied on a relative basis. The Bank of Canada signalled last week that interest rates will remain on hold, after the central bank hiked rates from 0.25% to 1% so far in 2010. The most recent rise was in September. Concerns over a renewed economic slowdown, particularly in the US (Canada’s largest trading partner) has caused the bank to drop their tightening bias.
The technical outlook is mixed. We are still trading within an uptrend based on the last few months’ price action, but longer term there is still a major downtrend in place. If we could break above 1.6500 it would open the way for further upside toward the January high around 1.7300. We would become more concerned if the Pound falls below 1.5800, a key support level formed during the third quarter.
Related posts:
- US Dollar Forecast – Sterling holds its ground…
- Australian Dollar Foreign Exchange Forecast – Sterling/Aussie dollar in a holding pattern…
- Canadian Dollar Foreign Exchange Rate Forecast – Canadian second quarter growth figures due out today
- Canadian Dollar Foreign Exchange Rate Forecast
- Daily Foreign Exchange Rate Forecast – UK currency lost ground versus the majority of the 16 most actively traded currencies
