By Jon Beddell
Foreign Currency Market Update – GBP / EUR Update
Two weeks ago it seemed the Euro could do no wrong, as a result of which Sterling sagged to a 14 month low against the unstoppable single currency. Both the Bank of England and the ECB kept interest rates on hold at their respective May meetings which threw up no surprises, but the change in tone from the ECB’s announcement did raise some eyebrows. Previously investors had expected the central bank to use the term “strong vigilance” to indicate a probable rate increase the following month. This time however there was no mention of vigilance, simply a commitment to monitor rates closely. That fell well short of market expectations and caused a sharp dip in the Euro as disappointed investors sold the currency. Suddenly Sterling was trading a couple of cents better, and the positive sentiment (or rather negative sentiment toward the Euro) continued into the middle of last week when the Pound briefly traded above 1.15. The rally seemed to run out of steam precisely when Bank of England governor Mervyn King delivered his quarterly inflation report on Wednesday. It wasn’t pretty reading. The bank slashed growth forecasts for this year and next, projecting just 2.0% for 2011 compared with the 2.8% they were expecting back in August 2010. The governor has been relying on an “export led recovery” but new data revealed that exports fell by by 4% in March. It seems that even with a persistently weak Pound the export story just isn’t shaping up. Data from the purchasing managers’ indices show that manufacturing and construction slowed in April, adding further colour to the picture of a stagnating economy. Balancing a generally weak economic outlook for Sterling, the Euro is still on the back foot with new rumours that Greece may leave the single currency. The Greek administration denied the gossip, but it does demonstrate that Euro zone debt stories are still bubbling away, and are never far from the surface. The shock arrest of IMF head Dominique Strauss Kahn over the weekend also adds a little more uncertainty to the already contentious Greek bailout, and the outlook for other debt laden EU constituents.
On the data front we have monthly inflation data due for release tomorrow. Retail prices are expected to maintain last month’s 5.3% year on year rise, with Consumer prices rising 4.1% against 4.0% last month. Despite the BoE’s reluctance to take action in the face of the stubbornly high numbers, we expect the market to be reactive to any figures that are significantly off forecast.
The technical outlook is far from rosy for the Pound, but we have at least put in a sharp reversal, leaving the recent lows several cents away. That at least removes the sense of dread that was gripping Sterling two weeks ago, but it remains to be seen whether this rally can be sustained. Early signs are positive, simply on the basis that we have already rallied over four cents, and even with the bearish inflation report we are still consolidating relatively close to the highs. Euro buyers should hedge their bets and cover at least half of any requirement now. An alternative strategy for those with risk appetite who believe the market will continue to rise would be to place a stop order below 1.12 and hope for continued upside. Speak to your TorFX account manager for more information.