Currencies Direct Reviews the State of GBP

10, November 2009

… in the Far East just as the currency looked as though it might consolidate at its recently hard won higher levels ahead of the release of the latest Quarterly Inflation Report from the Bank of England and the US public holiday – both tomorrow.

Then at 5:18 this morning, Fitch said that the UK was most at risk of losing its AAA sovereign rating amongst the major economies, with Germany being the least likely. Cable dropped from 1.6755 to 1.6610 without touching the sides and GBP/EUR witnessed a corresponding fall from 1.1183 to 1.1090 before a recovery of sorts.

At 6.14am the ratings agency attempted to repair the earlier damage to Sterling by reiterating its outlook for the UK as stable because the Government (which ever party this relates to) is expected to articulate a stronger fiscal consolidation plan over the next 12-months. Sterling bounced a tad, up to 1.6660 and 1.1120 which are about the levels we are at now.

This price action, unfortunately, negated some earlier positive news from the UK showing that the RICS house price balance came in better than the pre-release survey and that, on the same vein, Britains are expecting things to improve with a poll in The Times indicating that people foresee good times just around the corner…. Today, with a lack of market moving data scheduled for the UK, the early drop in Sterling will likely weigh for most of the day.

A strong German ZEW could add to pressure on the pound later this morning. I suppose the BIG question that comes from this little cameo is whether the UK Government will be able to deliver the goods in terms of the assumed spending cuts. A maintaining of the tighter fiscal policy will also support the opinion that UK interest rates will stay lower for a longer period than had been originally assumed and that these facts favour the view that Sterling’s cyclical weakness is set to continue for some time yet.

Other than that, equity markets had another good day, Wall St up by a strong 2.03% and S&P up 2.22% leading to an expectation for a good showing in Europe. It is possible that ahead of the Veteran’s Day holiday in the US tomorrow, we see a little profit taking but the trend for the remainder of the year looks set to carry on ever onwards and upwards.

Again, this will add further downwards pressure on the the US dollar and lead to a test of the support level against the euro at 1.5060 and the more important Fibonacci level of 1.5168 which is the 76.4% retracement of the July/November 2008 extremes.

Report by Phil McHugh

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Compiled by Tom Nadir.

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