by Jon Beddell
Foreign Currency Market Update – GBP / USD Update
The pound took a blow yesterday when ratings agency Fitch said that the UK faces a “formidable” challenge in reducing the deficit and stabilising government finances. However, markets were not unduly effected because this is nothing new. The prime minister has been voicing similar concerns, leaving markets torn between punishing the pound for our weak financial situation, and rewarding the currency because at least the government are aware of the challenge and are expected to take steps aimed at addressing the deficit in the emergency budget due on June 22nd. On balance, sterling is being given the benefit of the doubt, especially when compared to the Euro. The recent €750bn rescue package did little to calm markets because it’s aimed at filling a hole rather than addressing long term structural concerns. ECB chairman Jean Claude Trichet is speaking later today ahead of tomorrow’s ECB policy meeting. Markets will be watching closely for any additional measures to shore up the Euro, or for signals or comments that could impact sentiment toward the single currency’s problems.
The other key driver of the Sterling/Dollar rate at present is the stock markets. The Dow Jones touched new four month lows yesterday, and while volatility levels have reduced since May, the weak performance is certainly favouring the US dollar as investors pull money out of higher risk assets and buy the dollar as a safe haven. This is dragging the Sterling/Dollar rate back towards the May lows around 1.4230.
The technical outlook is negative. The downtrend is still in motion, and we would need to see a sustained break above 1.4775 to call that into question. Dollar buyers should consider hedging any exposure. Clients looking to sell dollars should consider placing a stop order above 1.4775 to protect against a reversal, while looking for further downside over the next few days.
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