Sterling Euro suggests further Sterling weakness
01 April 2011
The Technical Trader’s view:
WEEKLY CHART
The big picture is of the completion of a bull falling wedge that has formed since the beginning of 2009.
But fascinatingly, and coincidentally, note the completion of a small Head and Shoulders Reversal – adding greatly to the bull impetus.
Look more closely.
DAILY CHART
The simultaneity of the completion of the H&S Reversal is clear.
Note too, the importance of the band 0.8654-8672. Initially, this was resistance overcome and then good support. Indeed, the catalyst for the completion moves.
Expect the Neckline currently at 0.876 to be good support on any pull-back
The Macro Trader’s view:
The outlook for Sterling against the other major currencies seems more or less unchanged - except against the Euro.
Against both the Dollar and the Yen, Sterling appears to be holding up reasonably well:
- In the US the fiscal position weighs on the Dollar
- In Japan the combination of the threat of further G7 currency intervention and the possibility that, away from Japan, the monetary policy cycle is close to turning. The ECB is talking up the need for higher rates and the US QE2 policy is close to completion so the Yen currently looks depressed.
Surprisingly, the Euro has emerged as the strongest of the leading currencies. Although the Sovereign debt crisis continues, with Portugal downgraded recently and at risk of being downgraded again and the Irish Bank crisis still rumbling on, foreign exchange traders are looking beyond these concerns.
They see:
- The Euro zone economic recovery being powered by a strong Germany.
- Germany taking the lead in how the Euro zone rescue fund should operate and dictating terms about how debt laden states can access those funds.
- The ECB becoming increasingly restive about inflation,
- The chance that Euro zone interest rates will rise as early as April (next week).
In the UK, the Government has taken bold steps to reign in runaway public debt, but risks a serious economic slowdown if the private sector is unable to fill the void created by drastic spending cuts and labour shedding.
But what really undermines Sterling, especially against the Euro, is the poor inflation comparison and the Central Bank response to it.
In the UK inflation never collapsed as frequently forecast by the Bank of England, even though in the Euro zone and US it fell so far deflation wasn’t just a risk but almost a reality. Now UK inflation stands above 4% and policy makers openly suggest it could rise to 5% this year. Compared to the CPI target of 2%, interest rates should already be increasing, but the Bank is nervous.
The majority of policy makers fear that if they tighten policy at the same time the government is implementing draconian spending cuts, the economy could be tipped back into a deep recession. Underpinning their decision to wait and see, is the belief that current inflation is a result of one-off shocks:
- The VAT increase introduced this year,
- The depreciation of Sterling during the financial crisis/recession, and
- The spike in energy and commodity prices.
If they are right, then statistically inflation is set for a sharp fall, but are they blind to current events?
The oil price is still rising and could rise very much further given unrest in the Arab world and new fears about the safety of nuclear power. This is feeding into food costs. Additionally, because of the policy stance in the UK and its great leap into the unknown, Sterling could depreciate further.
In short, the Pound is undermined against the Euro by uncertainty and until it becomes clear, whether or not the current policy mix is working, the Pound looks set to weaken further against a Euro supported by expectations of higher interest rates.
Mark Sturdy
John Lewis
Seven Days Ahead
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