Sterling / US Dollar Research Report
- Europe dominates the news
Sterling Dollar GBPUSD FX Technical Analysis
Sterling - Dollar has certainly been on a rollercoaster ride in June. On the 1st the currency pair was staring into an abyss at 1.5270, however by mid June the proud Pound had rallied over 3% up to 1.5778. The cause of this extreme move was of course events within the Eurozone. Last month any thoughts of sterling being a safe haven had been abandoned with investors realising that as the EU is our main trading partner the fate of Sterling was clearly linked to events in Europe. A sharp sell-off ensued as the Greek elections loomed and Sterling lost some of its lustre. The Greeks voted to remain in the Euro which, in the short term, was viewed positively by the markets and Sterling was able to rally on renewed optimism. How long this lasts is another question with the markets focus now moving on to Spain.
The Pounds fortunes are correlated with the Euro, although policy makers do still have the option of tinkering with monetary policy in order to boost demand. The Bank of England rate setting committee (MPC) voted 5-4 to leave quantitative easing (QE) on hold in June. Crucially BOE Governor Sir Mervyn King opted to vote for an additional £50 Bln worth of stimulus to be added to the UK economy and during his testimony to the Treasury select committee he did not rule out cutting interest rates from the present level of 0.5%. He certainly painted a rather gloomy picture of the UK economy highlighting that the uncertain outlook for the Eurozone will remain a significant drag on economic activity in the UK.It is clear that the MPC feel that the economy needs further stimulus in order to drag us out of recession. With this in mind Sterling will struggle to rally significantly in the short term.
The EU summit will probably ensure that we remain in current ranges for the time being but once these have concluded expect the market to focus on next month’s interest rate setting meeting on 5th July as there is now an increased risk that more QE is on the cards. The market is already pricing in an extra £50-75 Bln which will certainly weigh on Sterling.
Dollar buyers should be wary as any rally will more than likely be sold into. The 200 day moving average is currently at 1.5750 which will provide initial resistance, perhaps of more importance is the 50% Fibonacci level at 1.5786. Buy orders should be placed around those levels. In the short term stop loss orders should be placed below 1.5514(23.8% Fibonacci level). Those with more time and deeper pockets may wish to leave their protection below the June low of 1.5270.
Dollar sellers have seen the market move in their favour over the last week can leave short term stop loss orders above 1.5664 (38.2%). For those with longer term horizons I would suggest protection be left if we see the market rally to 1.5800 hoping for a re test of the recent lows of 1.5270.
Momentum Indicators - GBP / USD