Sterling continues to edge lower; dovish inflation report seen

Morning Comment        

Current mid-market inter-bank spot rates (as at 07:50 BST)

Major sterling

Major US$

Sterling emigrate

Other sterling

Euro crosses

Fundamental

The euro was in consolidation mode yesterday; unable to sustain early gains which had built on Friday’s rally but also recovering from subsequent losses to close the day largely unchanged. Italian PM Monti seemed to be doing his best to undermine the single currency as he called for greater coordination to avert a ‘psychological break up’ in the region. Meanwhile, there were conflicting reports from Germany over the appetite for ECB bond purchases with the government seemingly backing the ECB while the Bundesbank remains opposed to bond purchases. On a positive note, Spanish and Italian bond yields

Sterling was also calm yesterday but with a bearish bias as investors wait for tomorrow’s Bank of England inflation report. Recent data and the ongoing threat of worse to come should the situation in Europe escalate suggest potential for a dovish report which has resulted in a soft pound.

Overnight, The Reserve Bank of Australia held interest rates steady at 3.5% as had been widely expected. There was a less dovish slant to the accompanying statement following recent strong data releases and the assertion that growth in China does not appear to be slowing further.

Ahead today, UK production data provides the initial focal point on the calendar. Unfortunately, both manufacturing and industrial production are expected to show sharp declines in June. German factory orders are also expected to have fallen in June. This afternoon, the latest NIESR GDP estimate for the UK looks unlikely to be anything other than downbeat.

Technical

£-usd

Following Friday’s sharp rally, sterling remains above the 1.5525 range mid-point but with strong resistance overhead at 1.5720/85 and momentum studies beginning to shift lower again, the upside looks limited. Support today at 1.5545, 1.5525, 1.5490 and 1.5475/70 with resistance at 1.5665 protecting the strong 1.5720/85 zone.

£-eur 

Sterling extended its losses yesterday to test the upper end of the 1.2575/1.2500 target area. We open today right on the 1.2575 level with momentum studies still favouring further downside. Should yesterday’s 1.2560 low give way, 1.2500 looks likely to come under fire. Sustained losses would then target the 1.2460 level. Resistance today at 1.2620/30, 1.2685, 1.2725 and 1.2765. 

Analysis of further currency pairs, forward contract pricing, and information on limit or stop loss orders is available at any time on request.

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