Sterling Market News - May

02/05/2012

Currency Overview

A 2 2/3rds cent gain (2.2%) against the euro as it reached 22-month highs was the strongest positive move in four months for sterling. Gains for the year so far now stand at almost 3 cents (2.4%).

A fourth consecutive monthly gain against the US dollar, this time of just over 2 cents (1.3%) leaves the pound 7 1/3rd cents (4.7%) up for the first four months of 2012.

Central Bank Policy

As expected, there was no change in policy from the bank of England MPC in early April leaving base interest rates at 0.5% and the asset purchase facility (APF) at £325bn. There was little reaction to the news with no accompanying statement as is normal when there is no policy adjustment. However, the meeting minutes released a fortnight later did throw up something of a surprise with Adam Posen dropping his call for a £25bn increase in the APF leaving David Miles as the sole member of the MPC calling for additional stimulus. The current round of asset purchases comes to an end this month and the latest minutes indicate a lessening chance of additional measures being applied. Sterling strengthened on the less dovish (or more hawkish depending on your interpretation) minutes with the MPC also admitting inflation is looking less likely to decline as anticipated in the near term.

Similarly, the ECB held interest rates steady at 1% with President Draghi noting there was no discussion about a change. The post meeting press conference was evenly balanced with Draghi acknowledging near term inflationary pressures from oil prices but that there was no evidence of ‘pass through’ costs and medium term expectations remain anchored. Also, any talk of exit strategy is ‘premature’.

In the States, the FOMC announced its quarterly economic projections but in combination with the press conference from Chairman Bernanke, the detail left investors as confused as ever on Fed policy projections. While this year’s growth outlook was upgraded as was the inflation outlook and the unemployment forecast was lowered, growth expectations for 2013 and 2014 were lowered. In addition, and despite the better outlook for the labour market, Bernanke again left the door open for QE3 as he noted the Fed remains ‘prepared to do more’ to stimulate the economy. There was also recognition of escalating sovereign debt fears in Europe with the ‘easing of global financial strains’ comment being dropped form the previous statement. 

Risk sentiment in general was boosted towards the end of the month with the G20 meeting concluding with a pledge to donate a further $430m to the IMF fighting fund. The figure was at the upper end of expectations and helped ease some of the pressure on peripheral EZ bond spreads.

Data releases

A very positive start to the month for the UK economy with news that the manufacturing, services and construction sectors all expanded at a faster pace than in February. Manufacturing growth hit a 10-month high at 52.1, the service sector PMI rose to 55.3 from 53.8 against expectations of a slight decline making it the strongest quarterly gain in the sector for two years. Construction PMI completed a trio of positive releases as it rose to a 21-month high of 56.7. The good news didn’t last long however with weak production data coming a day later. Manufacturing production fell 1% from January which was itself downwardly revised although the wider measure of industrial production rose 0.4%, boosted by sharp rises in energy output. Trade figures were also weak, with a 3.4% decline in exports taking the overall goods deficit up to £8.78bn. Producer price inflation fell to a more than two-year low of 3.6% although this was above the 3.4% consensus. PPI data was perhaps a heads up for CPI a few days later which rose a notch to 3.5%, the first increase since last September, on higher food and clothing prices. There was good news for a change on the unemployment front with a fall of 35,000 in the three months to February although unemployment levels remain well above those of a year ago. Retail sales were also strong, rising 1.8% in March although the figure was distorted somewhat by panic buying of fuel ahead of a perceived fuel tanker strike. Probably the most disappointing news of all was reserved for the initial reading of GDP for the first quarter. Despite the positive signs from PMI releases at the beginning of the month, the UK slipped into a technical recession with two consecutive quarters of negative growth. Q1 GDP came in at -0.2% on the back of -0.3% in Q4. Consumer sentiment surveys were mixed with the Nationwide measure rising 9 points to +53, a 9-month high while the GfK measure held steady at -31, towards the low end of the range over the last three years. 

Technical Outlook

£-eur

The latest sterling advance which began last July from just above 1.10 gathered momentum last month but stopped short of testing the 1.2395 high from June 2010. The monthly close was the strongest since October 2008 at the beginning of the global financial crisis and only the second above 1.2150, the 38.2% retracement of the 1.5300/1.0200 fall through 2007/08. We can use this level as a near term barometer of sentiment and while it contains any pullback, the 1.2345/95 area remains the initial target for bulls. Beyond here, 1.2500 and 1.2750 would be the next levels of note. Below 1.2150 brings 1.2000/1.1965 into play ahead of 1.1815, 1.1760 and 1.1660.

£-usd

In posting gains each month so far in 2012, sterling has advanced just over 7 cents in 2012. Adding to the positive price action, were consecutive closes above the 200 week moving average in the second half of the month, the first such closes since August 2008. Bulls are clearly in control although resistance at 1.6300/25 is currently capping gains. However, if this area can be cleared, we would look towards 1.6425 then 1.6500/65 to attract with 1.6615 and last year’s 1.6745 high waiting in the wings on sustained strength. Support now sits at 1.6120/1.6075, 1.6020/00, 1.5925, 1.5835/00 and 1.5600.

<<Back