Pound seeks shelter from troubles
KATHLEEN BROOKS
FOREX.COM
Is sterling still the wallflower of FX? It certainly was for most of last year when it was essentially moving hand in hand with euro-dollar was doing. However, the Bank of England (BoE) has been much more important for sterling’s fortunes in recent weeks, and it was moves by the Bank that caused sterling-dollar’s ascent to $1.63 and then its decline to below $1.58.
It’s been one step forward, one giant leap back for the pound, and problems in the Eurozone are only exacerbating cable’s decline. Below $1.5645 – a key Fibonacci support level – we could see a test of the $1.5620 lows from earlier this year. Below here things get ugly.
Even downward pressure on euro-sterling has slowed, and this cross is very sticky around the £0.8000 level. This is partly due to domestic concerns limiting sterling strength, even against the single currency.
The outlook for the pound remains fairly bleak: continued Eurozone concerns could cause it to fall to lows against the dollar that we haven’t seen since November 2011. While a dovish BoE could thwart any attempts at a sterling rally. The biggest risk to the upside for sterling is the election of a pro-bailout party in Greece that spurs a relief rally in the markets and causes support for the US dollar to fade.
ANGUS CAMPBELL
CAPITAL SPREADS
Sterling on the whole remains relatively attractive to those investors looking for a safe haven in all this uncertainty surrounding the Eurozone. The news flow has not been euro favourable, with possible Greek exit from the single currency and a potential bailout for Spain, which is looking increasingly like it might need to tap the debt markets in order to prop up their domestic banks. There are fears that it won’t be long before the state will require IMF and EU funds to avoid a similar fate to Greece.
Even though the UK economy is struggling, having recently dipped back into a recession, and investors know that they are going to get little in the way of yield due to the BoE keeping interest rates so low, many are willing to place their money in the biggest economy in the EU, but outside the Eurozone. If you’ve got money tied up in the single currency and you are worried about it, the nearest and probably most natural place to stick your cash is in the Great British pound.
BRENDA KELLY
CMC MARKETS
While a Grexit remains a possibility, it’s difficult to make a definitive call on the potential impact on the UK as a whole. While not immune to the Eurozone crises, the UK has benefited from non-membership, not least the ability to lower interest rates to record lows of 0.5 per cent, as well as embark on quantitative easing measures to the tune of £325bn.
Expectations are that the Bank of England will adopt a wait and see policy and keep its powder dry until greater clarity is gained on the Greek and Spanish troubles.
Sterling witnessed major declines against the dollar throughout the whole of 2008, culminating in a low of £1.35 in early 2009. A brief unsuccessful attempt to break through the £1.70 level in August 2009 has seen the pair trading in a triangular consolidation for the past two years.
Against the single currency, the euro’s woes add up to dollar and to a lesser extent sterling gains. The break below €0.8170 was significant given that it was the 50 per cent retracement of the 2007 lows to the highs of late 2008.
MARKUS HUBER
ETX CAPITAL
While the UK is continuing to do rather poorly financially, with overall debt levels and the budget deficit being one of the worst in Europe (even exceeding those of Spain in 2011), sterling is expected to continue to benefit from the fact that the UK is not part of the Eurozone. There seems to be no end in sight for the European financial crisis – matters are likely to get worse first. Most recently, the Spanish banking sector took a huge hit. Investors will continue to remain risk averse and shy away from European assets and the euro in general. Certainly not an ideal situation for Great Britain to be in. On the one hand, a strong sterling is certainly a positive when trying to bring down inflation, but at the same time after having recently fallen back into a recession it is becoming less competitive, with goods and services out of the UK more expensive compared to their European neighbours. This isn’t going to help to jump-start the economy.