GBPEUR/GBPUSD
The Pound rallied to the highest level this year against the Dollar, as oil prices surged above $60 a barrel and stock market gains persisted on speculation that the worst of the recession may be over. The UK currency also challenged resistance levels above 1.1400 against the Euro, after the minutes from the Bank of England’s last policy meeting recorded a 9.0 vote to keep rate on hold.
Policy makers were unanimous in their desire to keep borrowing costs unchanged at a record low of 0.5% and to increase the quantitiatve easing programme by a further £50 billion. There was some debate as to whether there should be an even more aggressive programme of bond buying and this likely to be slightly negative for Sterling.
The Pound extended gains against the Dollar yesterday, after breaking through its 200-day moving average, triggering a cluster of orders to sell the Dollar against the Pound. The UK currency broke through key resistance levels overnight and rallied to a fresh yearly high of $1.5813. The underlying positive sentiment for the Pound continued, after an industry report showed that UK manufacturers were the least pessimistic on the outlook for production in eight months in May.
The report from the Confederation of British Industry recorded further very weak levels for the orders component but the output reading was more positive and maintained hopes that the sector is stabilising. The improvement is risk sentiment has seen the Pound rally above key technical levels against the both the Euro and the Dollar. The upside momentum may continue after the MSCI World Index of stocks rose to the highest level in over six months, amid reports that Bank of America Corp raised about $13.5 billion in a stock sale.
Daragh Maher, deputy head of global foreign exchange strategy at Clayon, said that “sterling is benefiting from the return of risk appetite which has seen stocks outperform. A lot of bad news has already been priced into the Pound, making it one of the most undervalued currencies.”. The UK currency advanced almost 2% against the Dollar yesterday, rising to it strongest level since December 17th.
Euro and Dollar buyers can currently benefit from the best currency rate for 2009, but should consider implmenting a stop order in the market to protect against a retracement following an aggressive upside move. A stop order could be utilised around the support at 1.1270 against the Euro and $1.5554 versus the U.S Dollar.
According to a number of key technical indicators, the Euro’s decline against the Pound is likely to persist. Parabolic Systems, which traders use to track the strength of the trend, switched to selling euros against sterling two days ago. The Commodity Channel Index, a gauge of price direction, also indicated that the Euro has been in an oversold position since May 18th.
The risk to the Pound’s upside momentum centres around the Bank of England and the possibility that it may be more aggressive with asset purchases, increasing them beyond the current authorisation of £150 billion. The minutes from the last policy setting meeting showed that policy makers discussed the prosepect of increasing the asset insurance program “should economic conditions require it.”
The Dollar slumped to close to the lowest level in eight weeks against the Japanese Yen yesterday, while the U.S currency also declined sharply against the Euro, amid speculation that the Federal Reserve will increase quantitative easing measures to boost purchases of assets and unlock credit conditions.
Data Released 21st May
U.K 09:30 PSNCR (April)
U.K 09:30 Retail Sales (April)
EU 08:58 Flash PMI Composite (May)
– Manufacturing
– Services
U.S 13:30 Initial Jobless Claims (w/e 16th May)
U.S 15:00 Leading Indicators (April)
U.S 15:00 Philly Fed Business Survey (May)
written by Adam Solomon
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