Market News

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 data released 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.