Market News

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

It seems that the markets are only seeing two world currencies at the moment. The US dollar versus everything else! As evidence grows that the economic recovery is faltering in the US, investors’ first reaction was to buy the US dollar as a safe haven from other economies that may be more impacted by a US slow down. Over the last few days the US data flow has got worse to the extent that investors are now selling the US dollar, and buying anything else in anticipation the Federal Reserve may need to declare further quantitative easing measures.

Fed’ chairman Ben Bernanke gives a key speech on Friday night at a meeting of top central bankers and investors will be hanging on every word for clues as to future policy.

Sterling is trading sharply unchanged against most other currencies this week as a lack of new information gives no real buying or selling impetus. All we can say in terms of recent data is that is has been “mildly comforting”. The Bank of England are keeping interest rates on hold, but clearly with an upward bias maintained by the one member who has voted for a hike for three months running. The public sector net borrowing figure was much better than expected. We “only” borrowed £3.8bn in the month compared with £6.1bn the previous year. The tax take receives a seasonal boost in July from corporation tax and VAT receipts. This did nudge the pound a little higher against the Euro but was generally seen as a minor event within an otherwise baron week.

As a fully paid up member of the anything else brigade Sterling has recovered the two cents it lost at the start of the week and is now approaching a key juncture around the 1.5619 – 1.5635 zone (based on the interbank rate). If it can capture that level we would become more optimistic of a recovery toward the recent highs around 1.60, but that still leaves some work to do. At the moment we are still in correction territory. So far that correction has seen Sterling give back around 30% of the May – August gains. Many analysts who use Fibonacci number analysis to try and predict market movements see the 38% (1.5335) as level as a key pivot; a move below indicates that this may be more than simply a healthy correction.

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

Today’s weekly chart shows a “bearish engulfing pattern” which analysts are pointing toward as evidence that Sterling has peaked. After rallying from lows around 1.42 over the last three months Sterling fell sharply last week as investors flocked for the safe haven of the US dollar in response to steep declines in the stock markets as evidence of slowing growth increases the cha ges of a double dip. Risk aversion is taking hold, driving a strong rally in the US dollar and Japanese Yen, while other currencies such as the Euro and Sterling are effectively treading water.

A widely expected moderation in UK consumer price inflation was confirmed yesterday. The figure came in at 3.1% for July, down slightly from 3.2% in June. Technical factors were also blamed for yesterday’s weakness after the Pound broke major support levels against the US dollar, leading to broader based selling.

The Pound is trying to put best foot forward this morning after the minutes from the latest Bank of England meeting showed that the nine strong committee voted 8-1 in favour of no change in interest rates. The lone voice for a rate hike was Andrew Sentance, who has voted for tightening at the last few meetings. Investors will be mildly reassured that Sentance is sticking to his guns after a run of weak data on the housing market, and the slowing inflation outlook contributed to a general feeling that we are sliding toward a double dip.

Clients with US Dollar requirements should consider hedging at least half now to avoid the risk of further downside. Alternatively, we have seen a good bounce from the interbank low of 1.5495 this morning. Clients may wish to place stop orders below there (based on the interbank rate) to benefit from any continued rally while limiting the risk of renewed downside.

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

Sterling continued to benefit from the Dollar’s broad based weakness last week. The big move was over on Monday as we surged from 1.57 to 1.59, and the rest of the week was spent consolidating those gains. It is no coincidence that the rally accelerated from the start of July, just as the stock markets were rebounding strongly off their 2010 lows. The general background of buoyant investor risk appetite has been a major boost for sterling as traders sell the US dollar and buy riskier currencies that benefit most from economic recovery. However, with interest rates still on hold at 0.5% there is little investment case in buying the Pound. The Bank of England held rates steady again last week, and we will have to await publication of the meeting minutes (9:30am on Wednesday August 18th) to see if there has been any shift in the 8-1 “no change” vote. The monetary policy committee are likely to stick to a cautious tack in the short term as economists closely monitor economic statistics for any perceptible reaction to government budget cuts. As if to underline the anticipated effect of the cuts, data released on Friday showed a 0.5% decline in industrial production in June, compared to an expected rise of 0.2%. The market was also disappointed with a smaller than expected 0.3% rise in manufacturing output. Despite Sterling’s tentative progress over recent weeks the spectre of a “double dip” still looms large in investors’ minds. As long as stocks are rising and the Pound is firm, traders are willing to continue to buy into the recovery theory, but it would only take a few bad news items to damage confidence and send the Pound reeling and traders flooding back into the safe haven of the Dollar.

The technical outlook remains positive. We are trading at six month highs, and are now preparing to attack the resistance at 1.6070. A close above there would open the way to levels like 1.6275 and 1.6460. Meanwhile, it would take a break below 1.5500 to do serious damage to the up trend.

Key data from the UK this week includes trade balance data at 08:30 on Tuesday, and the Bank of England’s quarterly inflation report at 09:30 on Wednesday.

The Federal Reserve make their latest interest rate announcement on Tuesday, and are widely expected to keep rates on hold at 0.25%. Trade balance figures for June are released on Wednesday.

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

After having drifted over three cents lower from the July 15th peak Sterling put on nearly a cent on Thursday after retail sales for June beat expectations. The Pound was quick out of the blocks on Friday as the much awaited European bank stress tests showed only 7 banks failing to make the cut, with all the UK banks passing. That helped Sterling put on another couple of cents as traders saw good reason to buy the pound and move money away from the safe haven of the US dollar. Second quarter GDP figures also helped the market rally as they showed the UK economy grew at 1.1% in the second quarter, an improvement on the 0.3% first quarter figure and much better than analysts had expected.

The dollar has weakened against almost all major currencies since Friday’s stress tests. Simply by passing without incident the tests have allowed investors to increase their appetite for risk and diversify away from the dollar. A heavy week for US corporate earnings announcements could put more pressure on the dollar if companies meet or exceed earnings expectations. Perversely, positive news on the US economy tends to dent demand for the Greenback as it spurs investors to become bolder and search for higher returns elsewhere.

The technical outlook is positive. The Pound bounced right off trend support at 1.51 last week and has since gone on to make new highs. A key test is the 1.5525 level that marked the high in April. We have already tested this today, and at time of writing Sterling has not managed to capture the level. A close above 1.5525 would give a further technical boost, making 1.5820 the new focal point (that was the late Feb’ peak).

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

Sterling rallied against the backdrop of a generally weak US dollar last week.

Stronger than expected employment data in the UK helped the Pound make strides after bouncing off a low of 1.4970. The number of people claiming unemployment benefit fell in June. Meanwhile, weak US manufacturing and consumer sentiment data prompted traders to sell the dollar lower through the course of the week, while better news on US bank profits improved risk appetite, boosting the “sell the dollar and buy higher risk currencies” trade. The Euro was a particular beneficiary.

The Sterling/Dollar rate went on to make a high above 1.5450 on Thursday, pulling back two cents on Friday. The big challenge now is the resistance at 1.5500. That was the April high, and a break above there would end the down trend that’s been in motion since the August 2009 high. The technical outlook is positive, but we want to see Sterling keep control of the 1.4970 level that marked last week’s low. Clients with Dollar requirements should consider placing a stop order below 1.4970. Meanwhile, the challenge is on to take out 1.5500 and see if we can establish a foothold above there.

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

Markets greeted the UK’s emergency budget with relief last week, bidding up the value of sterling as fears of a credit downgrade receded in light of positive initial comments by ratings agencies and economists. While making cuts that may dent economic activity, the new government also produced a set of modest 5 year growth projections that markets can believe in, and a plan to reduce borrowing from 10% of GDP to 1% over the same period. That the budget was not as bitter a pill as many expected did not dent the general perception that the government is taking action to address the deficit and by doing so putting the pound on more credible footing and preserve the UK’s all important AAA credit rating.

Last week’s Bank of England minutes showed that one of the nine member committee that sets interest rates actually voted to increase rates by 0.25% at the June meeting. Andrew Sentance was alone in wanting to raise rates, but it still gave markets the feeling that rates in the UK may go up in the foreseeable future, and that helped sentiment toward the pound.

The only thing preventing the pound from making larger gains against the dollar is the state of the stock markets. US stocks closed at new 8 month lows last night after falling more than 7% over the last two weeks. That has driven many investors to sell high risk assets and buy the US dollar, helping to dull the impact of sterling’s recent strength. However, last night the dollar rolled over after enduring a string of negative data including higher unemployment claims, weak manufacturing and surprisingly low pending home sales. Compounded by a successful Spanish bond auction of €3.5bn this all sent the dollar reeling, and the Euro suddenly rebounded. The net effect on the Sterling/Dollar rate was a two cent improvement!

The technical outlook for Sterling is positive in the short term. A tentative uptrend can be seen developing on the far right of today’s chart and the pound has finally managed to take back the 1.50 level which gives a significant psychological boost. This was clearly a major barrier back in early May when we spent several days testing that level from below just before plunging towards 1.43. We should now see a continued improvement toward the next key resistance at 1.55. We urge clients who are looking for higher levels to consider placing a stop order below 1.47 just in case things turn negative again.

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.

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

A sharp bout of risk aversion has swept the markets over the last week as investors dumped the euro on escalating fears over the single currency’s future. The Euro has plunged by up to 9% against the US dollar in May, with Sterling notching up a 7% fall over the same period. Investors have been buying into the traditional “safe haven” of the US dollar and Japanese Yen, both of which have strengthened sharply in May. The worst affected currency group has been the high yielders like the Australian dollar and South African Rand. These are the currencies that benefitted most over recent months as investors sought risk and higher returns. As those positions are unwound, these currencies have been hard hit, with the Aussie dollar falling by 12% against the US dollar in May.

UK retail sales rose 0.3% in April, but markets barely noticed. Minutes from the latest Bank of England meeting confirmed the view that interest rates will stay low for while yet. Again, no reaction. The sole focus for Sterling right now is the emergency budget to be announced on June 22nd. Investors are looking for information on how bad the deficit is, and what measures will be taken to address it. Until we have a clear fiscal tightening plan in place, sterling will struggle to sustain credibility while investors remain nervous. The FTSE 100 index of leading UK stocks has plunged by over 15% over the last four weeks, wiping out billions in market value and prompting investors to reassess their attitude to risk. In the US, the Dow Jones index is also down, around 12%, but notably the losses have not been as steep as in the UK. That reflects the market perception that the UK will be worse effected by the European currency crisis. For its part the Euro has failed to take comfort from the €750bn stabilisation package backed by EU countries, the EU and the IMF. There is open talk of whether any countries will exit the single currency, and what steps would need to be taken in order to achieve an exit. A speech by German chancellor Angela Merkel announced a ban on naked short selling of certain securities, but her acknowledgement of the seriousness of the Euro’s crisis sent markets nose diving around the world. The rumour mill was given fresh fuel yesterday when the Spanish government nationalised a small savings bank.

The Sterling/Dollar exchange rate is being driven by risk aversion. If stock markets can find support and rally, then sterling will follow as investors start to tentatively move away from the dollar. However, if stocks continue to sag, the dollar will remain strong.

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

Markets were calmed yesterday as a rescue package for the ailing Euro coincided with some optimism that a resolution to the UK election was close at hand. The FTSE surged 5%, and high yielding currencies rallied. The Dollar slipped, allowing the Pound to make early gains, but by the end of the day most of those gains had been erased as a fresh wave of uncertainty gripped the markets. Pundits are even now calling the Euro debt program a short term fix only. The EU action was prompted after yields on Spanish and Portuguese debt rose toward crisis levels last week, and the Euro plunged 5% against other major currencies, raising the spectre of a major currency crisis. The €750bn package being fronted by the EU and ECB is designed to stave off short term debt problems for the weakest euro zone countries while structural reforms are implemented to tackle the underlying reasons for their debt problems. Spain’s unemployment rate is 20% and the country is still in recession. Portugal’s economic health is equally frail. The alternative to this extraordinary action was to allow markets to drive the Euro lower and potentially force the destruction of the union. The importance of this development has perhaps been overshadowed (at least in the UK) by the general election, which is still the only headline story.

Sterling slumped by over a cent immediately after Gordon Brown’s resignation statement which left the door open to a Labour / Lib’ Dem’ deal and cast doubt on whether a Tory / Lib’ Dem coalition would be formed. This continued uncertainty will be the main driver of Sterling this week. A key £2bn bond auction to be held this morning will give an indication of the market’s current appetite for UK debt.

The technical outlook is mixed. Sterling broke below the key 1.4774 support (March low) on Friday but managed to claw back the losses before the market closed. Yesterday we had a look at the 1.50 level but didn’t like it, selling off to end the day almost unchanged. This is volatile price action, and we would recommend clients on both sides of the fence hedge at least half of any exposure now. The trend is still down, so we continue to favour the Dollar until Sterling can prove itself by capturing 1.5150.

by Jon Beddell

Foreign Currency Market Update – GBP / USD Update

A bout of investor risk aversion is helping the Dollar this week. Slowing Chinese growth, a major oil spill and continued fears over the Greek debt situation conspired to drive stock markets sharply lower. The dip in global stock markets in turn boosted the US dollar gain against most other currencies as investors bought the currency as a “safe haven”. The greenback was helped further by extreme weakness in the Euro following confirmation of Greece’s €110bn rescue package over the weekend. The euro failed to take comfort from the news, and retreated sharply as traders examine the cracks in other euro zone economies, particularly Spain and Portugal. Spanish prime minister Luis Rodrigues Zapatero was yesterday forced to deny that Spain would be the next country to seek a rescue package from its EU counterparts. These tensions sent the Euro over 1% lower against the dollar.

Meanwhile, the election dominated the newswires in the UK, almost eclipsing a sharp rise in manufacturing activity. The Purchasing Managers Index rallied to a reading of 58 in April, up from 57.3 last month. A reading above 50 indicated expansion. The increase in activity is partly attributed to the Pound’s relative weakness, a trend that makes British goods cheaper for foreign buyers. On the negative side, mortgage lending fell sharply in April, underlining the fragile outlook for the housing market.

Back on the election trail, the market is already pricing in a high probability of a hung parliament resulting in a coalition government. Given the unprecedented uncertainty surrounding this general election, any outcome is likely to be greeted with short term relief. Simply getting the vote out of the way should give Sterling some much needed stability while investors digest the result and decide whether the next government will tackle the budget deficit. The big question is whether the stock markets will also stablise, allowing the pound to recover this week’s losses against the dollar. Continued weakness in stocks would help the Dollar, offsetting any post election bounce in the pound.

The technical outlook is in serious danger of turning negative. Major technical support at 1.5125 was tested yesterday and we actually spent time trading below that key level. If the market closes below there today it would set the scene for a return toward the March lows around 1.4800. Buyers of the Dollar should consider covering half of any requirement now, and the balance if we make a daily close below 1.5125 (based on the interbank rate).