Sterling awaits inflation data and BOE minutes
Quiet data day ahead of a week of turmoil
FX Market Overview
Flicking through the world’s media it appears the London Olympics were definitely perceived as ‘Happy and Glorious’ just as Jacques Rogge suggested. I thought it fabulous that the largest roars within the reaction to the closing speeches were reserved for the security staff and the volunteers. I was also very pleased that the closing ceremony was a lot more upbeat than the opening one. Rio looks like it will be fun doesn’t it.
The reality of the market the morning after the night before is that very little data will pass across the newswires today so traders will get a chance to nurse their hangovers in peace. Britain’s business and political leaders are hoping they can ride the Olympimania wave and keep the goodwill going but this week brings UK inflation data and the Bank of England’s meeting minutes to keep us all on edge. We are expecting a drop in inflation to maybe 2.3% and that will take the pressure off the BOE a little but it also allows room for the bank to add some stimulus to the economy and that could weaken the Pound in the short term. Did they discuss that at their last meeting? Well we will find that out on Wednesday. Elsewhere, the general themes remain; tension over the next steps in the Eurozone, fears over just how deep and sustained the slowdown in China might be and uncertainty over whether the UK authorities have a plan to drag Britain out of recession. On the side-lines of this are the Australasian Dollars which had mixed fortunes last week relating to poor NZ employment data and contrasting solid Australian employment numbers.
The Canadian Dollar had a poor end to the week after a surprise drop in employment levels and this week is a heavy one for Canadian Data so volatility in the loonie is assured. There is more detail on what shape that volatility could take below.
So as we bask in the afterglow of a games-well-done, the inevitable question is about your highlights. I can’t decide between Chris Hoy’s mum not daring to look when he was so nearly pipped at the post or maybe Kat Copeland’s reaction to winning the women’s double sculls; “we won the Olympics. We are going to be on a stamp”. Maybe it was Laura Trott’s boundless enthusiasm or Jess Ennis’s ....well....everything really. All in all, I think it was the amazing roar every time a British competitor appeared or performed. What a buzz.
Currency - Euro/US Dollar
The Euro -US Dollar exchange rate is characterised by this 14 month downtrend. We are experiencing a small scale upward movement within that overall trend and a pattern that is as clear and consistent as this one is thankfully very easy to take advantage of. Euro buyers can target anything above $1.20 and expect success whilst euro sellers have a pretty clear short term target of $1.23 and perhaps the opportunity to get something covered at between $1.24 and $1.2500. It is clear that this pair is most likely to eventually test the June 2010 low of $1.19 and we will have to wait to see if that marks the bottom of the range or whether the Euro really is doomed.
Currency - GBP/Australian Dollar
An improvement in the Australian unemployment figures was just the fillip the Australian Dollar needed this week; it boosted the Australian Dollar in spite of some worrying Chinese data. It is a double edged sword for those migrating to Australia. Good news on the job front is great if you are moving to Australia to start a new career Downunder but it damages the amount of Australian Dollars you are going to get for your Sterling when you move. You can laugh and cry in equal measure. As you can see from the chart above, this is just a continuation of a trend that has been in place since the middle of May and which looks likely to take the Sterling - Australian Dollar exchange rate back to the February low of AUD 1.4550. This downtrend owes as much to the strength of the Australian Dollar as it does to the poor old Pound though so until the UK economy starts to show signs of life or until something dire happens to weaken Chinese demand dramatically, we are likely to continue in this downward trend.
Currency - GBP/Canadian Dollar
As mentioned above, the Governor of the Bank of Canada, Mark Carney is in very upbeat mood and his confident suggestion that interest rates are likely to rise earliest in Canada rather than anywhere else has offered some incentive for international investors to buy the Canadian Dollar. Perversely, the effect of his overt confidence will act as a trailing anchor on the Canadian economy because it has strengthened the Canadian Dollar and that makes Canadian exports more expensive. That said, there is little doubt that Canada’s export customer, America, is helping to drive the growth in Canada and, stumbles and stutters aside, the US economy is still growing. That Canadian Dollar strength has taken the Sterling - CAD exchange rate back to the March low and the downward momentum doesn’t appear to have dissipated. I would guess we will see something of a bounce at C$ 1.5450 but the size and pace of that bounce will determine whether we settle back into the downtrend or Sterling manages to mount some form or a rally. Sadly, I think the latter scenario is less likely.
Currency - GBP/Euro
With all the speculation over the future of the Eurozone, it is no surprise that the Euro is near its weakest level against the Pound in 6 ½ years. In fact the question is why the Euro isn’t much weaker. I guess if the UK economy was a little less damaged, we would be seeing €1.30 and above for this pair but Britain is where it is; the government is sticking to its austerity plan and the Bank of England is expecting 0% growth in 2012 so it is unlikely the Pound is going to rally hard at any stage. So in the short term, the pound is being capped at €1.2725 and if that breaks, we may see another drive to €1.2900. The support for Sterling is roughly in line with the 60 day moving average and that has aligned itself with a trendline, currently at €1.2550. What would be really interesting would be a break to either €1.30 or below €1.2450. Those mark the outer limits of the current range and a break in either direction would be a game changer.
Currency - GBP/New Zealand Dollar
Occasionally we have a chart that totally conforms to the rules of technical analysis and this is just such an occasion. Having created a head and shoulders pattern, the Sterling - New Zealand Dollar exchange rate is now on the cusp of confirming the breakout and that could be hugely significant. If the Pound fails to make it back above NZ$ 1.94, that will be the confirmation of a fall in this pair to NZ$ 1.8750 initially and ultimately to NZ$ 1.8076. Without trying to bore you with details, that would be a fall of the same magnitude as the height of the spike in the middle of this chart. There are some fundamental matters that may change this picture; a slowdown in China, a rise in the New Zealand unemployment rate and there is always the chance the Eurozone will sort out its problems.....or maybe not. Either way, this isn’t a definite outcome but it is a fairly likely one.
Currency - GBP/US Dollar
The uncertainty on both sides of the Atlantic is keeping the Sterling - US Dollar exchange rate in relatively tight ranges. In fact since the bounce at the start of June, this exchange rate has been trapped in a triangle between an upward trendline at $1.55 currently and a number of trendlines and the 100 day moving average around $1.57 to $1.5750. Nothing has happened to change that pattern and it makes life rather straightforward for both buyers and sellers of US Dollars. Automated orders based on these interbank levels are proving an excellent short term strategy and while the US 3economy fails to fully re-ignite and while the UK economy is as flat as a pancake, there is little reason to expect any change to this pattern. But when we finally do get a breakout; expect fireworks.
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