French still adding austerity measures

Today's Highlights

Sterling boosted by UK data

French still adding austerity measures

Canadian inflation could surprise

FX Market Overview

Yesterday's main event was the rise in the value of the Pound after exceptionally positive data. Unemployment fell to 6.9%, 77,000 fewer people claimed unemployment benefits and average wages rose by 1.7% (that's above the 1.6% inflation figure released a day earlier). It has called into question just how long the Bank of England will be able to sit on its hands before starting to raise interest rates and some commentators (the more radical ones generally) are suggesting the UK base rate will be 1.5% higher by the end of 2015. Sterling had to strengthen and it did. There is really no data to speak of from the UK today and then it is a 4 day weekend so the Pound is likely to pause for thought...and chocolate.

European news was overshadowed by news that, even as the UK economy appears to be recovering apace, France has imposed an 18 month freeze on state benefits as part of a €50 billion austerity package. Europe is also fairly light on data today but we do get German producer prices and that may be influential.

The US Federal Reserve published its Beige Book last night. That showed economic growth in 10 of the 12 regions but mixed results on employment. It did, though show positive signs in manufacturing and that is good news. The Fed's major headaches are generally employment and housing so we will see how that impacts the next Fed meeting. We get the weekly jobless benefit claims figures from the US today and then they too will be on a 4 day break so the markets will be light and volatile in the interim.

We will see Canadian inflation data this afternoon. The forecast is for a slight rise in inflation to 1.4% but figures elsewhere have been very erratic so there is room for the unexpected here. The Canadian Dollar has been sliding in value for over a year but bounced back a little over the last few weeks. Yesterday's decision by the Bank of Canada to leave the base rate on hold was widely expected so that didn't change things much. At the moment, C$1.8640 is the target for the Sterling - Canadian Dollar rate.

Away from the markets, it seems it is a dog's life after all. In Stockton-On-Tees., a Rottweiler called Zeus has been sent a polling card for the European elections, in New Jersey, a German Shepherd has reportedly been called for jury service and in Brampton, Cumbria, police have tracked down the vandal who has slashed dozens of tyres on vehicles in the village. CCTV footage shows a Border Collie called Jess biting holes in the tyres. I don't know, dogs taking over, super-rats arriving by the boat load, what is the world coming to?

Have a great Easter everyone. See you back at the same time, same place on Tuesday. I warn you, I may be a few pounds heavier by then.

Currency - GBP/Australian Dollar

Putting the movement of the Sterling – Australian Dollar exchange rate into context is quite easy when you look at a chart showing the whole movement since the 2008 financial crisis. The collapse in the Pound began to slow in 2011 and the recovery began just over a year ago. More recently, Sterling lost some of its shine when softer UK data caused some profit taking amongst investors. That saw the Pound slip below the upward trend it had been in for about a year. This was the first significant correction in an otherwise unrelenting rise. However, a fall in UK inflation, a rise in UK wages growth and a drop in unemployment all combined to give the pound a boost this week. We also had softer data from China cause a dip in the value of the Australian Dollar. So a recovery of sorts is developing. The hurdles to a resumption of the upward trend are at A$1.8060 and at the trendline which is currently around the A$1.85. IF neither of these levels can be breached, a larger drop to A$1.7364 is on the cards.

Currency - GBP/Canadian Dollar

The upward momentum in the Sterling – Canadian Dollar exchange rate appears unabated. We have seen a bit of a correction over the last month or so but as soon as this week's positive UK data hit the newswires, the pound regained some of that lost momentum. The obvious barrier is at 1.8640. Sterling has spent 3 of the last 9 weeks trying to break above that level. As yet, no success but with the Bank of Canada leaving their base interest rate on hold and pinning their hopes on export growth due to a US recovery, there is plenty of scope for a slip up there.

Currency - GBP/Euro

If you are a buyer of Euros, this chart looks like a whole heap of good news really. The 5 year upward trend is intact, the shorter term 12 month uptrend is intact and there is room for the Pound to make it to €1.24 within that short term range without causing any hysteria. If the pound does take a step back, it could fall all the way to €1.16 and still be in the long term uptrend. We don't envisage that at the moment so no need to panic just yet. Data-wise, the UK is looking rather healthier than Europe. Today's data showing a fall in unemployment and growth in average wages came a day after a fall in inflation and the picture does look rather good. But the UK does need a stronger European economy if it is to export its way out of trouble. That isn't the picture at the moment but there are signs of recovery in Europe and that is stopping the Pound from ramping away with gay abandon. €1.23 is proving a tough level to break and until it does, we have to assume further choppy sideways action in this pair.

Currency - GBP/New Zealand Dollar

Chinese economic growth slowed in Q1. The slowdown wasn't as pronounced as many had feared so the effect was muted but it still weakened the Australian and New Zealand Dollars. So, with the Kiwi Dollar on the back foot, a boost in UK unemployment data was enough to get the Sterling – NZ Dollar exchange rate moving higher again. The bounce looks fairly clear but beware; there is a reserve Bank of New Zealand interest rate decision next week and some analysts are suggesting we will see the RBNZ edge interest rates higher or hint at doing so in their press conference. That would stop and maybe even reverse some of this gain. The key levels are support for the Pound on that trendline; roughly NZ $1.93 at the moment, and resistance will be found at NZ$1.98 and the psychologically significant NZ$ 2.00. With the long weekend in some countries, this may well be a great weekend to place an automated order to try to capture NZ$ 1.98.

Currency - GBP/US Dollar

For nearly 6 years the Sterling – US Dollar exchange rate (cable to its friends) has been trapped below $1.6826. That may seem an odd figure and it is but it marks the 50% recovery of the fall from the July 2008 high at $2.0151 to the January 2009 low of $1.3500. As you can see from the attached chart, with all other technical analysis stripped out, Sterling had a crack at breaking above that level through 2009, again in 2011 and is trying again now in 2014. If it does manage to make that break, the target will switch to the next major resistance level at $1.7610. However, having seen so many previous failures, it would be no surprise if the Dollar made another recovery and pushed Sterling back to $1.6050 and maybe even as low as $1.5560 in the short term.

Fundamentally, the Pound is showing signs that it may make the break higher. Improving unemployment figures, manageable inflation and the suggestion that wage increases are picking up have all added to the Pound’s demand. Only nagging doubts about retail activity and concerns over yet another consumer led recovery are weighing on Sterling.
US data has been frustratingly mixed and the US Federal reserve committee are clearly undecided about when or indeed whether to continue with the scaling back of their bond buying regime. That may be enough to continue the weakness in the USD.

On balance, whilst past trading patterns suggest the Pound ought to fail at this level, the changing circumstances in the UK and US economies are such that this may well be the time that Sterling gets it opportunity and the US Dollar gets it comeuppance.