By Jon Beddell
Foreign Currency Market Update – GBP / USD Update
Sterling looked poised to break higher against a beleaguered US dollar two weeks ago as the president and Congress struggles to reach an agreement on the US debt ceiling. Last Monday evening a deal was done, and the logical reaction would have been for markets to rally and the dollar to fall as investors moved money off the sidelines toward higher yielding assets. However, markets decided that the difficulty in reaching a deal was bad news, and stock markets embarked on a punishing sell off that has wiped trillions of dollars off global markets. In that environment investors have been selling high yielding currencies and moving money into safe havens, one of which is the US dollar. Further evidence of slowing US growth has also exacerbated the wild market swings and perversely benefitted the dollar.
In the UK industrial production contracted 0.3% year on year compared to expected growth of 0.2%, and manufacturing growth was just 2.1% versus 2.8% expected. The June trade deficit also came in worse than expected. Add a generous pinch of rioting and Sterling’s cake was baked. Having pulled back from an attack on the 1.6550 resistance level last week Sterling has dipped toward 1.61 in interbank trading and we’ve seen a little recovery over the last 24 hours. However, things are looking more fragile for the Pound, and if stock markets go back into meltdown mode we can expect the dollar to strengthen. In this uncertain environment it seems sensible to cover any exposure while prices remain around the 1.60 level.