Sterling slips as Bank of England lowers growth outlook

Morning Comment          

Current mid-market inter-bank spot rates (as at 08:30 GMT) 

Major sterling  

Major US$  

Sterling emigrate  

Other sterling  

Euro crosses 

Data / Events due today 

Fundamental 

Although the escalating Eurozone crisis remained very much at the forefront of the mind yesterday, UK unemployment figures and the Bank of England quarterly inflation report dominated the morning calendar. There was a second successive fall in jobless claims while the ILO measure saw unemployment fall by 45,000 in the three months to April, the largest decline in a year, which brought the unemployment rate down a notch to 8.2%. Despite these better than expected reports, with the UK back in recession the jobs market is far from being in a sustained recovery. The pound edged higher in the wake of the data but gains were short lived as it took a hit following the release of the latest inflation report. According to BofE Governor King, although inflation is now expected to be stickier in the short term, it is seen falling below target in 2013 while growth forecasts were revised sharply lower. Unsurprisingly, the ongoing crisis in Europe is seen as a major threat to the UK economy. 

The other big news on the day came with the early evening release of FOMC minutes. Although there was little to change seen in the economy from the previous minutes, there was a dovish twist with ‘several members’ noting additional easing may be necessary if the recovery falters compared to ‘a couple’ at the previous meeting. Data wise in the States, industrial production was stronger than expected at +1.1%, the biggest gains since December 2010. There was mixed news for the housing market where housing starts grew but at a slower than expected pace while building permits fell sharply, driven by a large fall in multi-family home permits. 

As for Europe, fears of a bank run in Greece have been played down but there is strong evidence of significant falls in bank deposits. Otherwise it was really more of the same with officials hoping Greece can remain in the euro. However, another month of uncertainty ahead of June elections is only likely to delay sufficient austerity implementation and there is little appetite to relax these demands. 

Ahead today, there is a small 3 and 4 year Spanish bond auction this morning but the data calendar only has second tier US releases this afternoon. This will not stop the newswires being busy though and we can expect continuing sound bites from Europe. 

Technical  

£-usd 

The break of the 2012 bull trendline has been the catalyst for another round of selling with the pound now testing 1.5900/1.5880 support. This area comprises of the 38.2% retracement of this year’s gains and the 200 week moving average and may well provide stiff support. Below here lies both the 100 day and 200 day moving averages which currently converge at 1.5825. Resistance today at 1.5955, 1.5985/1.6000, 1.6030/50 and 1.6065/70. 

£-eur  

Although the pound eked out yet another marginal 3 ½ year high yesterday, the subsequent pullback ended with the largest one day decline I two months. While at little over ½ a cent the fall was far from significant, it is backed up by a downturn in momentum which may just suggest a short term top is in place. Support at 1.2485/80 is the first level to keep a close eye on for signs of additional weakness which could take us back towards 1.2385/50. Resistance now at 1.2575/80, 1.2615 and 1.2750. 

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