Sterling gained just over 2/3rds of a cent or 0.6% against the euro in January to post its third consecutive monthly advance for the first time since the first half of 2010.

Despite hitting a fresh 18-month low against the dollar, sterling recovered to close the month just over 2 ½ cents or 1.7% up on the dollar.

PMI releases for the December period were generally positive for the UK. Although the manufacturing sector remained in contraction territory, the 49.7 print was an improvement on November and well above expectations for a slight decline. The construction sector also confounded consensus for a slowing in growth, expanding to 53.2. The best news was reserved for the service sector which again beat expectations for a decline from 52.1 in November to 51.5 by accelerating to 54.0. Not such good news from a trade perspective with the trade deficit widening sharply in November as slowing growth in Europe led to a fall in exports. Production continued to disappoint and reignited fears of a double dip recession with the 0.6% decline in November being much worse than consensus. Inflation continued to decline as anticipated by the Bank of England. CPI fell to its lowest level in six months with the 4.2% print with core inflation slipping to 3.0% from 3.2% a month earlier. Unemployment was again a cause for concern with the number of unemployed hitting 2.68m, a 17-year high. The figure took the ILO unemployment rate to 8.4% in the three months to November. Retail sales in December bounced back from weak data the previous month although the 0.6% increase can be largely attributed to heavy discounting by retailers. Public Sector net debt in the UK has now topped £1tn prompting Bank of England Governor King to predict an ‘arduous, long and uneven’ path of recovery. Anticipation that the UK economy had contracted in the fourth quarter was well founded with the preliminary reading showing a 0.2% decline in activity. In the face of all the weak data and gloomy outlook, GfK consumer confidence surprisingly improved to -29 from -33, the highest reading since last June to end the month on a positive note. 

Sterling advanced for the third straight month and posted a higher low and high for the sixth month in a row while also posting a 16-month high against the euro. All very positive but we still need to see a convincing run and close above 1.2150 to suggest we challenge the 2010 high at 1.2395which in turn is the gateway to the psychological 1.2500 level and 1.2750, the 50% retracement of the 1.5300/1.0200 January ’07 / December ’08 collapse. While 1.2150 continues to provide stubborn resistance, we need to keep a close eye on 1.1895/80 support below which could trigger a sell off towards 1.1745/00.

The pound was under pressure in the first half of January but recovered from a new 18-month low of 1.5240, just shy of strong support around 1.5200/1.5180. Some important hurdles lie ahead however if we are to see these gains extend further, most notably at the 200 day moving average currently near 1.5950 and the 50% retracement of the fall from last year’s 1.6745 at 1.5995. These together with the psychological 1.6000 level look likely to provide a stiff test should sterling bulls take this run further. Only beyond here would suggest we take a non preferred run up towards 1.6170 or even 1.6390/1.6420. Support now lies at 1.5740, 1.5635, 1.5560, 1.5485, 1.5390 and the 1.5240 low from last month which all protect the 1.5200/1.5180 area mentioned above and the psychological 1.5000 level.