Deflation on the cards in the Uk

US Dollar Research Report

Deflation on the cards in the Uk

FOMC removes the word "patient"

Political risk weighs on Sterling

Sterling Dollar GBPUSD FX Technical Analysis

The Sterling dollar exchange rate has been making a series of lower highs over the course of March. Sterling has consistently failed to sustain any rally above 1.5000. Momentum would suggest that the weakness in the Pound is set to continue as both technical and fundamental indicators weigh on the Pound. Inflation in the UK slumped to zero which was a much larger fall than anticipated by any analysts as lower oil continued to drag prices lower. Although the UK economy has recovered significantly since the crisis began inflation has sagged and wage growth has been disappointing. Governor Carney has insisted that the current deflationary situation is temporary and is , in fact , positive for the UK economy however core inflation which strips out energy also fell in February so this must be a concern for policy makers. What is certain is that the market will now be watching the CPI data very carefully and if there is a hint that this may persist for the foreseeable future then the Pound is likely to fall much further as the bank runs out of options.

The dollar has also continued to strengthen after the Federal Reserve moved to the verge of raising interest rates for the first time since the economy fell into recession seven years ago. In a statement released after its 2 day policy meeting the Fed said that they would consider raising the benchmark rate as early as June and they also removed a promise that they would be "patient". The Fed tempered their message by stating that they thought that the unemployment rate could fall further without triggering higher inflation and the general impression is that rates are going up although this may not happen until the end of 2015. Any move higher will be dependent on the data and non-farm payrolls will take on even greater significance.

Looking ahead the Pound could well struggle to make any gains as markets begin to price in the political risk of the upcoming general election. The latest opinion polls show a rise in support for the Labour party after the recent television interviews and if the opinion polls narrow leading into the election we can expect the Pound to fall further. Markets do not like uncertainty and if the political landscape after the election is ambiguous the effect on the Pound could be catastrophic.

In terms of data US non-farm payrolls this Friday will be very closely scrutinised for a strong number which would confirm that a rate rise was imminent in the Us allowing the current trend to continue. In the UK the election will be the main focus and swings in the opinion polls will most likely influence near term direction.

For USD Buyers

I still maintain that any rally should be sold into and I now feel that 1.5000 is a key level both psychologically and technically. If we are lucky enough to see that again then I would suggest purchasing dollars there. A break of 1.4500 on the downside would open up 1.4000 very quickly.

For USD Sellers

The Rate looks offered and I would leave protection above 1.5000 hoping for a break of the recent 1.4585 low.