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.
Related posts:
- Foreign Exchange Daily Insight – The Pound rallies against the Dollar, as global stock markets continue to rally
- The Dollar stood firm against the majors depsite a larger than forecast drop in U.S non farm payrolls
- Foreign Exchange Daily Insight – The Pound continues to decline as the Conservatives’ say public finances in a “very bad” state
- Foreign Exchange Daily Insight – The Pound rallies higher against the Euro, despite comments from David Cameron on the state of UK public finances
- Foreign Exchange Markets – US Dollar Update
