Is this lift-off for Cable?
04 February 2011
The Technical Trader’s view:
MONTHLY CHART
The tight trading range between 1.3688 and 1.7050 is clear.
WEEKLY CHART
And within that range the market has described a Triangle.
But triangles are not normally reversal signals, but rather, continuation patterns. That is, in this case, bearish,
The test of the upper diagonal would gain credibility if the near high was overcome as well.
DAILY CHART
The near-term Prior High pivot is clear at 1.6298.
Bulls need a break above there to convince on the upside.
(Note, in addition, the cluster of Fibonacci resistances above the 1.6298 level.)
So we remain skeptics of the bull run - for the moment until there is an unambiguous break of the 1.6298 level.
The Macro Trader’s view:
Our long-term view of Sterling is that the currency was over-sold during the financial crisis/recession and that a recovery against both the Euro and Dollar was to be expected.
When we last wrote about Cable here in our weekly update on 20th January we said...
...” Our current view of Cable is the Pound isn’t yet sufficiently free from uncertainty to allow it to fully recover. Until there is greater clarity about the economy’s ability to weather the current fiscal retrenchment, we judge the Pound is likely to suffer a correction lower, before the big rally begins, so in conclusion the recent high may be it for a while”...
Cable did indeed correct lower on January 25th, but was that the correction we meant? And if not, what if anything has changed in the UK economy to send Cable almost back to the highs made in early November last year?
In our earlier piece we were concerned the economy was set to suffer a growth shock as a result of the Coalition government’s fiscal retrenchment, evidence for which we thought would present as Q1 data began to be revealed. In the event, the Q4 GDP data released on January 25th was very much weaker than even the biggest pessimist had expected and that was largely responsible for the sell off on that day mentioned above.
But Cable quickly bounced. Part of the reason was the hawkish MPC minutes released the next day. But really, they were a little too historic since policy makers wouldn’t have know the Q4 GDP data when the January meeting was held, and if they had their tone might have been less hawkish.
The other reason that the Pound has recovered has been fears about inflation, not just in the UK but globally. The PMI manufacturing surveys released this week by the leading economies, including the UK, were all stronger than expected, but they all also revealed a worrying build up of inflationary pressures.
Today saw the release of the UK PMI Service sector survey which covers a much larger part of GDP and that too was stronger than expected. Moreover it was the best reading for 10 months and halted and reversed a worryingly weak trend that had established over recent months.
The Q4 GDP report cannot be ignored, it was truly weak, but the strong performance of this week’s PMI surveys suggest the Bad weather might have been responsible for much more of that weakness than previously supposed, meaning the underlying health of the economy could be stronger than feared.
That said, the US too has released very strong equivalent ISM manufacturing and non-manufacturing data this week and Cable has slipped from the highs reached earlier today.
But in Sterling’s favour, the Dollar looks fundamentally weak for two reasons:
- The recent crisis in Egypt, a regional lynch pin and key US ally, failed to force any Dollar safe haven buying, and
- The fiscal position of the US is untenable long term and requires a plan to correct it, so far resisted by Obama.
For these reasons we judge the ground has shifted in Sterling’s favour, but given the uncertain outlook for the UK economy, don’t expect Cable to rally as dynamically as it previously sold off, at least not just yet.
Mark Sturdy
John Lewis
Seven Days Ahead
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