Bright start to 2010 for Sterling

forex trading

As usual, the trading periods between the Christmas and New Year holidays threw up some sharp moves, especially in the Dollar/Sterling cross, with one 24-hour session seeing cable trade up from 1.5850 to 1.6225 before settling back down below 1.6100. The few Banks still operating certainly enjoyed themselves….. Today we start with Sterling looking relatively firm and the Yen soft. Euro/Dollar, which didn’t experience the more extreme moves seen in cable, remains in the mid 1.43s. The Yen has been the weakest currency over the last month since the newly elected government embarrassingly forced the Bank of Japan to change its established tack and boost QE whilst expanding fiscal spending. This has renewed appetite for using the Yen as a funding currency and with expectations that interest rate differentials are set to widen against the Japanese currency, this trading trait looks set to grow, to the Yen’s detriment.

An article in the Wall St Journal today gives reasons for caution as we enter 2010, singling out the UK as having the worst fiscal position of all the industrialised nations, noting that, unlike several other headline grabbing countries, the UK does not have either an implicit or explicit guarantee from a friendly nation that stands behind its debt should things take a turn for the worse. Given that PIMCO (Pacific Investment Management Co), which runs the largest largest bond fund, have announced that it is cutting its holdings of both UK and US government issues owing to the spiralling debt burden in both countries, it suggests that Sovereign standing is going to be the focus going forward.

Sterling has also been lifted on the back of good economic data this morning. UK Manufacturing PMI came in at a 25 month high, mortgage approvals also came in much better than expected as did mortgage lending. Good start to the trading year for sterling.

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US Dollar:

Asian central banks jumped in to prop up the dollar on Thursday as it slumped to a 14 month low against leading currencies. The ICE Futures US Dollar Index, which measures the dollars value against a basket of six currencies including the euro, the sterling and the yen, fell to 75.767 points in trading yesterday, its lowest point stance since August last year. A report from the Thai central bank said it had intervened in the foreign exchange market to temper the strengthen of the Thai baht. Central banks in South Korea, Taiwan and the Philippines, as well as Russia, were also buying dollars. The US dollars slump came after investors, emboldened by reports of economic recovery from around the world, dumped the safe haven dollar in favour of high risk currencies . Another reason for the dollars bounce came after Federal Reserve Chairman Ben Bernanke said the central bank needs to tighten its grip on monetary policy when economic recovery is in place.

Data 13.30: Trade Balance expected -$33.0B from -$32.0B. Speakers 17.15: Fed’s Kohn.

Sterling: The sterling took full advantage of an initial dollar sell off yesterday as risk came back into the markets and investors sold the greenback and funded more riskier assts by using the euro and sterling. This pushed cable up from $1.5860 to hit an intraday high of $1.6119. Overnight we have seen the sterling come off against its US counterpart after comments from the Fed Chairman buoyed the greenback and prompted dollar buying in Asian trading. Against the euro, sterling held its ground as an initial rise came after the Bank of England left interest rates unchanged at 0.5% and made no more plans to extend the QE program, although they didn’t say they were going to end the QE program either. The small rise against the euro was then given back as the ECB also left interest rates unchanged at 0.5%, pushing GBP/EUR back to the 1.0850 levels. In relation to the BoE Monetary Policy meeting yesterday, there seems to be a sharp divide in opinion emerging over whether the Bank of England should widen its policy of quantitative easing next month. The MPC adopted a wait and see approach yesterday, continuing its £175 billion scheme of QE. However, there have been calls for the Bank to pump more money into the economy. Data 09.30: PPI Input MoM –0.8% from 2.2% & YoY –6.8% from – 7.5%. Visible Trade Balance –6.300B from –6.479B.

Euro:

The euro was trading higher yesterday after the European Central Bank left interest rates unchanged at 1% as expected. We saw the single currency hit a session peak on Thursday after Trichet said at the ECB’s rate setting meeting that excessive currency volatility is negative for the economy and financial stability, and that US support for a strong dollar is extremely important. The euro hit an intraday high against the dollar of $1.4815, but has been pulled back now after comments from the Fed Chairman Ben Bernanke said the Fed is ready to tighten monetary policy once a recovery takes hold, prompting currency players to buy the greenback. Against the sterling, there was a see-saw battle as the UK currency also took stock from a ‘no change’ stance by the BoE and also left the QE as is.

Data 09.00: Italian Industrial Production MoM 1.5% from 1.0%.

General:

Spot gold is lower this morning trading at $1,046.80/oz, down $8.10 from the New York close.

Alcoa kicked off the earnings season on a positive note, while Macy’s, Home Depot and other discretionary stocks climbed on retailers first collective same store sales gain since August 2008.

Forex Forecast – Technical Analysis

EUR / USD (1.4700)

Pair reached a new peak above channel recovery from 1.3832. Now couple consolidated near the top of the inverted channel from the June lows (now at 1.4713) and near the level of 1.4719 (maximum of 18 December 2008 + neckline double bottom). State support is at 1.4611 / .4606 (current week minimum / base of the envelope on the daily chart), then at 1.4595 / .4583 (the base of the envelope at the weekly chart / 23.6% from the June lows of 1.4845 + base projection channel on the daily chart). To maintain a positive attitude couple should stay above this area.

Level = 1.4438 hour breakthrough: to maintain the medium-term trend of the couple must stay above this area. Resistance takes place in the area of 1.4713 / .4715 (short-term moving average on the daily chart), followed by the levels of 1.4736 (the top of the envelope on the daily chart) and 1.4766 (time break), where the possible consolidation.

In case of further growth next resistance is at 1.4803 (reaction high time), then in the field of 1.4845 / .4867 (current week high + wave C of 1.2457 / max September 2008 + peak envelope on the weekly chart).

This level will be difficult to pass on the first attempt against the danger of overbought and bearish divergence.

USD/JPY (90.30)

Pair reached a new reaction low, but is still above the canal, from 97.79 (the same thing today on the daily charts: channel from 97.75 with a broken top at 88.68).

The first area of resistance is at 91.29 / 91.36 (short-term moving average on the daily chart / hour reaction high) followed by levels of 91.69 / 91.76 (the top of the envelope on the daily chart / hour reaction high + middle Bollinger band on the daily chart) and 92.55 / 92.68 ( current reaction high of 90.12 / hour mid-term break), where the possible consolidation.

In case of further growth next resistance is at 93.05 (38.2% from 97.79 – 90.12), then at 93.31 (maximum of 7 September) and 93.75 (mid-term moving average on the weekly chart).

This level will be difficult to pass on the first attempt. The first area of support is at 90.35 (the current week minimum), then in the area of 90.15 / 90.12 (base Bollinger band on the daily chart / minimum 16 September).

This level will be difficult to pass on the first attempt.

In case of a further reduction next support is at 89.99 (the base of the envelope on the weekly chart) and 89.22, followed by consolidation.

EUR/GBP (0.9170)

After the reversal of .8705 couple reached a new high recovery in the breakout above the top of the channel from .8453 and against the background of the Bank of England Governor King.

Now couple tries to continue its upward movement above the top Bollinger band on the daily chart (currently at .9166).

The first area of support is at .9144 (break time), followed by levels of .9084 / .9080 (the base of the envelope on the daily chart / short-term moving average on the daily chart) and .9061 (day break).

To maintain short-term trend couple must stay above this area.

The level of .8950 = medium-term moving average on the daily chart: to maintain the medium-term trend of the couple must remain above this level.

The first area of resistance is at .9193 (potential + current new high recovery of .8400), then at the level of .9216, where the possible consolidation.

In case of further growth next resistance is around .9225 / .9232 (top of the projection channel on the daily chart / 76.4% of .9490 – .8400), and then at .9268 (61.8% of .9805 – .8400).

This level will be difficult to pass on the first attempt.

EUR/JPY (132.80)

Resistance is at 133.95 (long-term moving average on the daily chart), followed by levels of 134.14 / .24 (the top of the envelope on the daily chart / short-term moving average on the daily chart), 135.30 / 135.49 (top Bollinger band on the daily chart / current week high) and 135.77 / .78 (61.8% from 138.72 – 131.01 / peak envelope on the weekly chart), where the possible consolidation.

In case of further growth next resistance is at 136.09 (maximum of 24 August).

This level will be difficult to pass on the first attempt. The first area of support is at 132.52 (potential + current week now at least), then in the area of 132.06 / .03 (76.4% from 131.01 – 135.49 / stop and reverse on the daily chart).

This level will be difficult to pass on the first attempt.

In the case of a further reduction next support is in the 131.57 / .30 (base Bollinger band on the daily chart / minimum of 14 September) and at 131.01 (a minimum of 2 September), followed by consolidation.

Forex Trading News

The sterling is under intense pressure this morning falling to 1.10 against the euro and slipping against the USD. The sterling has not been helped by wobbly risk sentiment, but the main damage seems to have been inflicted by an article in the Telegraph. The paper reports Lloyds Banking Group has been forced to abandon it’s plan to withdraw from the Government’s toxic debt insurance scheme after failing to raise enough capital to meet the FSA’s strict requirements. As we experienced previously jitters in the UK banking sector hurt the sterling and given the bad sentiment already surrounding the sterling it is no surprise to see it fall on this news.

Among the other factors weighing on the sterling; the likelihood of early move by Bank Of England to cut deposit rate paid on bank reserves; likelihood of additional Quantitative Easing coming soon; and of course dire public finances. The recent rally in the FTSE will have provided the sterling with some support- the concern is that if equities sell-off the sterling could drop further. We need to see some consolidation over the next few trading sessions to support the sterling; the better than expected public sector net borrowing data gave the sterling a reprieve this morning and it has edged up from the lows but a dead cat does not bounce.

Yesterday we saw some respite in the selling of USD with a little US dollar strength coming back into the markets against the euro, sterling and Japanese Yen; equities struggled a little yesterday too and this could be a sign that the recent push to sell USD is starting to look tired.

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