By Jon Beddell
Foreign Currency Market Update – GBP / USD Update
The US Dollar is one of the only major currencies against which Sterling actually gained last week. Not only did the Pound put on a full three cents during the week, but it also posted its highest weekly closing price in 16 months. The Dollar has been under pressure on two fronts. Firstly an increased appetite for the Euro as interest rates were raised to 1.25% on Thursday and further hikes appear to be on the horizon. Secondly the failure of president Obama to secure agreement with Republicans over US debt levels, leading to a possible “government shutdown”. A shutdown can occur when congress fails to agree on the annual financial budget, leading to all but essential services being discontinued. Up to 800,000 federal workers would potentially be placed on extended leave. The last Federal shutdown was in 1995 and 1996 under Clinton. The first one lasted only six days, but cost the economy an estimated $800m.
Portugal finally succumbed to its debt woes and went cap in hand to the EU after bond yields rose to unsustainably high levels over the previous week. Prime minister Jose Socrates had already thrown in the towel in the face of the market’s unwillingness to fund new debt issues, pretty much what happened in the lead up to the Greek and Irish bailouts. The announcement was therefore not fully discounted, but neither was it a big shock, allowing the Euro to take it very much in its stride, losing only a few basis points against Sterling before recovering to end the week at five month highs. It’s thought that any rescue package will need to be around €80bn. Counterbalancing the bad news on Portugal, the ECB raised interest rates by 0.25% to 1.25%. That was also very much expected following the hawkish comments made by ECB chairman Jean Claude Trichet last month, but nevertheless gave the Euro another reason to rally.
In contrast, the Bank of England kept rates on hold at 0.5%, and expectations of a UK rate hike have receded to June/July despite stubbornly high inflation. Industrial production contracted by 1.2% in February compared to expectations of a 0.4% rise. In the main Sterling was weak, but the Dollar was weaker.
The technical outlook is positive. Having thoroughly tested the key 1.60 support level two weeks ago Sterling has rebounded strongly and is now attempting a break of the 1.6400 resistance. The uptrend is therefore intact, and we would only become seriously concerned if the 1.60 level was broken. Clients should consider hedging half of any Dollar requirement while rates are trading at the highs.