Market News

03/02/2010

In a similar vein to December, the pound began the new decade with mixed results. Against an under pressure euro, a 2 ½ cent net gain (or 2.2%) was posted last month while the dollar strength, which had been evident throughout much of December, resumed in the second half of the month pushing sterling almost 2 cents (1.1%) lower to close the month back below 1.6000 for the first time since last September.
 
Central Bank meetings once more provided no changes in interest rates or to asset purchase programs. However, this does not tell the whole story as both the ECB and FOMC meetings were far from uneventful. At the ECB meeting, President Trichet was tough talking on Greece whose debt situation has been a large factor in recent euro weakness. Meanwhile, across the pond, there was a subtle change in the language of the statement where the recovery outlook was revised to ‘moderate’ from ‘weak’. There was also a notable dissention in the camp with Kansas City Fed President Hoenig going against his eight colleagues  in suggesting conditions had improved sufficiently to remove the ‘exceptionally low’ rate for an ‘extended period’ reference in the accompanying statement.

As noted last month, debt problems in some if the Eurozone nations have been a constant threat to the stability of the euro while the subtle shift by the FOMC together with a decrease in risk appetite has ensured the dollar has remained firm.

As far as the UK is concerned, strength in the manufacturing and service sectors was confirmed by PMI index releases while mortgage approvals and mortgage lending both provided positive surprises. Mid month data gave the pound another boost as jobless claims fell by over 15k, business optimism rose to its highest level since April 2007 and CBI industrial trends also pointed to improving conditions. However, other releases were less encouraging with retail sales well below consensus confirming a disappointing festive season for retailers while public sector borrowing continued to soar. The month drew to a close with a less than convincing return to growth in the UK after 6 consecutive quarters of recession. Consensus for 0.4% growth turned out to be far too optimistic with the economy actually growing by a meagre 0.1%.

Data aside, the Bank of England’s Andrew Sentance was notably hawkish on more than one occasion last month noting interest rates may have to rise to keep inflation in check and that the Bank must be ready to adapt its policies.

Looking ahead, the looming UK election could have a large bearing on the pound as investors and ratings agencies keep a close eye in developments, specifically towards how the huge debt burden will be addressed. Similarly in Europe, Greece is not alone in its troubles with Portugal already on ratings watch with Spain, Italy and Ireland not far behind.

On the technicals, the pound is back pressuring an important support zone against the dollar between 1.5885 and 1.5705. It is important that this zone holds up or the chances increase for a deeper fall towards 1.5350. Initial recovery targets from current sub 1.6000 levels lie at 1.6080/85 and 1.6155 beyond which stabilises the outlook and brings 1.6275 and the strong 1.6355 level back into play.

£-eur hit 5-month highs towards the end of last month but ultimately ran into resistance in the 1.1600/50 zone. Beyond here is required to take sterling to the next level following the sustained break of the 200 day moving average (1.1320). Above 1.1650 would open up 1.1750, 1.1825 and the 1.1905 high from last summer. It is important that dips are contained by 1.1320 to prevent a deeper setback which could test 1.1270, 1.1240 and 1.1125.

December proved to be a mixed month for sterling as it gained over 3 cents (3%) on the euro but slipped almost 3 cents (1.7%) against a strengthening dollar. Over the course of the year, the pound produced relatively healthy results with a net 15 cent (10.5%) gain against the dollar and 8 cents (7.7%) against the euro. However, coming off multi-year lows against the dollar in January and historic lows against the euro at the end of 2008, these gains have to be taken in perspective.
 
Interest rate wise, no change again to the UK’s 0.5% base rates or for that matter the £200bn asset purchase program. The Bank of England was the first major central bank to meet in 2010 but once again there were no adjustments made to policy. Similarly, interest rates in Europe and the Sates remained steady at 1% and 0.25% respectively.
 
Unemployment actually fell in November against consensus, the first fall in unemployment since February 2008. Activity in both the manufacturing and service sectors remains buoyant although the construction sector continues to lag behind. Inflation picked up more than expected in November but retail sales were a disappointment as they fell by 0.3% in the month. Early indicators however point to a more profitable month in December for retailers although the outlook for the early part of this year is perhaps less rosy.

The final revision to the disappointing Q3 GDP figure saw another small improvement but the UK remained the only major economy in recession with negative growth of -0.2%. Already released last week were the latest mortgage approvals and lending figures, both of which showed encouraging rises.

Projections on currency outlook continue to be driven by relative interest rates, budget deficits and growth. In this regard, the situation in Europe is being closely monitored, specifically in the case of Greece with Portugal, Spain, Italy and Ireland all having potential to see their sovereign ratings downgraded. There have also been veiled warnings to both the UK and more recently the US to the same effect should they fail to bring budget deficits under control. The UK General Election due before June will be a huge event but provided the dreaded hung parliament can be avoided, the next government should provide the necessary measures to avoid such a scenario.

Technically, the pound remains entrenched in a broad 10 cent, 7-month range where the bulk of price action has been concentrated within $1.58-1.68. More immediately, this week has seen the pound turn positive for the year after last week’s slippage and we now need to clear congestion in the $1.6310/60 zone. If we can regain this area, the upper end of the range will come back into focus. Downside risk from current level is to $1.58/1.57 but if we were to break here, sterling could come under heavy pressure with little in the way of support until $1.5270.
 
Against the euro, the last couple of months have been similarly range bound with €1.0925/1.1325 providing the support/resistance. The €1.1050 level has been pivotal for some time and for sterling to break into a more bullish position we need to see it clear a tough area of resistance at €1.1265/1.1320 which would clear the way for gains towards €1.15 initially with potential to €1.18/1.19 further out. Risk from here is a break back below €1.1050/1.0925 which would put the pound back under pressure again targeting the €1.0625 low from last October.
 

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