by Jon Beddell
Foreign Currency Market Update – Sterling / US Dollar
“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.
