By Jon Beddell
Foreign Currency Market Update – GBP / USD Update
Sterling has continued to build on the recent reversal from the 1.5800 low, taking advantage of a broadly weaker US dollar exchange rate. It’s not so much that the Pound is now a well regarded currency but more to do with the stalling US debt talks. If Congress cannot agree a package with president Obama by August 2nd the US will default, a scenario that until this week the markets would not countenance. Even now with the deadline fast approaching markets are still confident that a deal will be reached. It’s hard to see where the dollar would go if the worst case scenario materialises. Since a US default would constitute a major financial crisis the dollar may actually strengthen as investors turn to “safe haven” assets. By that logic one could also assume that once the deal is reached the dollar should fall as investors relax and take on more risk, selling the dollar and buying higher yielding assets.
Last week’s economic data was closely watched but did not produce any major surprises. The UK’s monetary policy committee voted 7-2 to keep rates at record lows this month according to the minutes released last Wednesday. The two dissenters wanted a rate hike. There was no significant talk of further QE, which gave additional comfort to Sterling. Government borrowing was higher than expected in June, hitting £14bn compared to £13.6bn last June and £12.5bn expected. Revisions to the April/May figures meant that overall the UK is still on track to achieve the required savings in the current fiscal year. The target is to reduce borrowing to £122bn this year from £143bn last year.
This morning saw the release of the first estimate of GDP for the second quarter. The office for national statistics produced a figure of 0.2% compared to expectations of 0.2% growth for the three months to June. Exactly as forecast, but Sterling still went sharply higher on the release as markets had convinced themselves that the actual figure would disappoint.
The technical outlook is still positive for Sterling. Having formed a tradable low two weeks ago we have built on that platform over the last week and broken trend resistance. Barring any unforeseen data shock we should see the Pound challenge the 1.6550 level over the next few days.