The existing U.S. Dollar bull market scenario analysis calls for the Dollar to rally towards a target of 84, with the initial buy trigger of 77.00 achieved during the past few days this now sets the scene for sterling weakness against the Dollar, which has already seen the GBP nose dive from £/$1.68 to below £/$1.60. A U.S. Dollar index rally to 84 would coincide with a drop in sterling to below £/$ 1.50, therefore presents a bearish starting point for chart analysis.
Two items stand out from the GBP chart:
1. That sterling is targeting immediate support at £/$1.57 which implies it may temporarily bounce from there back through £/$1.60 before the eventual break.
2. That a break below £/$1.57 would target a trend to below £/$1.40.
On a longer term view, the chart is indicative of trading range between £/$1.57 and £/$1.37, on anticipation of the eventual break of £/$1.57. On average this implies a 10% sterling deprecation against the trend of the preceding 6 months or so. I expect sterling to fall against other major currencies such as the Euro where it targets a drop of 10% or so from the current 1.12.
Two items stand out from the GBP chart:
1. That sterling is targeting immediate support at £/$1.57 which implies it may temporarily bounce from there back through £/$1.60 before the eventual break.
2. That a break below £/$1.57 would target a trend to below £/$1.40.
On a longer term view, the chart is indicative of trading range between £/$1.57 and £/$1.37, on anticipation of the eventual break of £/$1.57. On average this implies a 10% sterling deprecation against the trend of the preceding 6 months or so. I expect sterling to fall against other major currencies such as the Euro where it targets a drop of 10% or so from the current 1.12.
What could drive sterling lower during 2010 apart form Dollar strength?
The obvious thing that comes to mind is the Bank of England keeping UK base interest rates artificially low (UK interest rate forecast for 2010 will follow in the coming week- newsletter) whilst the economy recovers, inflation rises and the trade gap widens, therefore this WILL impact on the currency and result in relative weakness as commodities such as crude oil are priced in dollars and thus will result in an inflationary feed back loop. Neither is the currency helped by open ended money printing to monetize the huge amount of government debt issuance as a consequence of a 12%+ budget deficit.UK Inflation Forecast 2009
Deflationary forces as a consequence of the the bursting of the asset bubbles has fulfilled the deflation forecast for 2009 as per the original analysis of December 2008 - UK CPI Inflation, RPI Deflation Forecast 2009 that forecast Deflation into Mid 2009 targeting RPI of -1.2% and CPI of +0.9% to be followed by an uptrend into year end back into RPI inflation of +0.9% and CPI of +1.6% as illustrated by the below graph.
