A Bruised Sterling Stabilises, Inflation Hits 2% BoE Target
By Rob Samson The pound to euro rate (GBP/EUR) is 0.33 pct higher at 1.2026. The pound / US dollar exchange rate (GBP/USD) is 0.38 pct higher at 1.64447. The pound / New Zealand dollar (GBP/NZD) is 0.19 pct higher at 1.9601. The pound / Australian dollar (GBP/AUD) is 1.26 pct higher at 1.8327 . The pound / Canadian dollar (GBP/CAD) is 1.02 pct higher at 1.7981. The pound / South African Rand (GBP/ZAR) is 0.36 pct higher at 17.7892.
BE AWARE: All the above quotes are taken from the wholesale inter-bank markets. Your bank will affix a spread to the rate at their discretion when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.
Latest exchange rates
BE AWARE: All the above quotes are taken from the wholesale inter-bank markets. Your bank will affix a spread to the rate at their discretion when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.
16:50: Sterling is a passenger on Wednesday
There are no major releases due out of the UK on Wednesday. This leaves sterling open to external market factors.
Today's recovery will bode well for further gains in the currency as the bull trading pattern is confirmed.
Today's recovery will bode well for further gains in the currency as the bull trading pattern is confirmed.
16:16: Sterling forecasts from Lloyds
The latest International Financial Outlook from Lloyds Bank Research has been made available.
We take a look at the sterling forecasts:
"Looking ahead, we retain a bearish view on GBP/USD. Although we are relatively upbeat on the prospects for UK growth, the unbalanced nature of the recovery and the highly stimulative stance of UK monetary policy leave the pound vulnerable, especially at these levels and with the Fed now tapering. We target $1.52 by end 2014. The challenges facing the euro area suggest the euro is also likely to weaken against the US dollar. Based on our view of EUR/USD, GBP/EUR is forecast to end 2014 little changed at 1.2."
We take a look at the sterling forecasts:
"Looking ahead, we retain a bearish view on GBP/USD. Although we are relatively upbeat on the prospects for UK growth, the unbalanced nature of the recovery and the highly stimulative stance of UK monetary policy leave the pound vulnerable, especially at these levels and with the Fed now tapering. We target $1.52 by end 2014. The challenges facing the euro area suggest the euro is also likely to weaken against the US dollar. Based on our view of EUR/USD, GBP/EUR is forecast to end 2014 little changed at 1.2."
15;57: GBP/USD back to 1.65?
"Yesterday’s GBP/USD selloff finally lost steam in the mid-1.6300s during U.S. afternoon trading and rates have since turned higher to regain the 1.6400 level. The two 4hr Bullish Pin Candles showed buying demand on dips and foreshadowed today’s early European session rally. Moving forward, the pair will look to today’s U.S. Retail Sales report for inspiration; another weaker-than-expected report out of the U.S. could push the pair back up toward the 1.6500 once again." - Matthew Weller at GFT.
15:42: Oil prices and USD strength
2014 is widely tipped to be a positive one for the US dollar. Tightening of policy at the US Fed will likely be the main driver behind this advance, however Deutsche Bank say oil prices will also feed into the dynamic:
"If DB’s forecast of lower oil prices materializes, this will provide further support for our stronger USD view. The Fed has tightened policy the year after the last 4 favorable ‘exogenous’ oil shocks. Historic precedent fits with current circumstances where lower oil prices help risky assets and the real economic recovery, such that initial Fed accommodation gives way to Fed tightening and a broadening of USD strength."
"If DB’s forecast of lower oil prices materializes, this will provide further support for our stronger USD view. The Fed has tightened policy the year after the last 4 favorable ‘exogenous’ oil shocks. Historic precedent fits with current circumstances where lower oil prices help risky assets and the real economic recovery, such that initial Fed accommodation gives way to Fed tightening and a broadening of USD strength."
14:00: RBS bullish on GBP/EUR, bearish on GBP/USD
Forecasts from RBS:
"Without the powerful fiscal headwind it faced in 2013, we expect the US economy to power ahead in 2014, which will support the dollar against sterling. Sticking to fundamentals, we believe economic conditions will remain challenging in the Eurozone despite recent signs of stabilisation. We therefore expect sterling to continue to appreciate against the euro with GBP/EUR rising into the mid 1.20s next year, towards its fair value."
"Without the powerful fiscal headwind it faced in 2013, we expect the US economy to power ahead in 2014, which will support the dollar against sterling. Sticking to fundamentals, we believe economic conditions will remain challenging in the Eurozone despite recent signs of stabilisation. We therefore expect sterling to continue to appreciate against the euro with GBP/EUR rising into the mid 1.20s next year, towards its fair value."
12:31: GBP faces risks in form of retail data
The UK currency may be in the process of recovering but we are already looking towards the next event risk due on Friday.
"Pound traders will now turn to the UK Retail Sales report this Friday for next directional clue about the the UK economy. The last four releases from UK have missed their mark suggesting that the pace of growth may have peaked in Q4 of last year. If Friday's report confirms those suspicions then cable could drift lower testing the 1.6250 level by end of the week," warns Boris Schlossberg at BK Asset Management.
"Pound traders will now turn to the UK Retail Sales report this Friday for next directional clue about the the UK economy. The last four releases from UK have missed their mark suggesting that the pace of growth may have peaked in Q4 of last year. If Friday's report confirms those suspicions then cable could drift lower testing the 1.6250 level by end of the week," warns Boris Schlossberg at BK Asset Management.
12:05: GBP tied to the USD
An interesting view of an emerging correlation between the GBP and USD from Investec:
"Another reason for Sterling’s weakness could be that its performance is becoming more correlated with that of the USD because the UK recovery mirrors that in the US. Both have seen a fall in the unemployment rate in recent months - they are likely to see a withdrawal of easy policy sooner rather than later and both 10yr Gov bond yields appear to be moving in tandem."
"Another reason for Sterling’s weakness could be that its performance is becoming more correlated with that of the USD because the UK recovery mirrors that in the US. Both have seen a fall in the unemployment rate in recent months - they are likely to see a withdrawal of easy policy sooner rather than later and both 10yr Gov bond yields appear to be moving in tandem."
GBP a tricky customer, but upside should prevail
"GBPUSD remains stuck in a choppy sideways range. Support still holds on Fibo retracement floor at 1.6315. While the downside correction was stronger than we had anticipated, we remain bullish as MACD is stable above the zeroline .We will be watching for a re-test of 1.6600 as a break above would trigger an extension of buying to 1.6750." - Ipek Ozkardeskaya at Swissquote Bank.
10:52: Forecasting a bullish rebound
ICN Financial have predicted GPB to rebound, confirming the viewpoint held by many analysts that the upward trend for Sterling remains in place… for now:
"The pair dropped sharply yesterday confirming the negativity showing on momentum indicators. But trading remained limited above 1.6360 levels as the pair failed to break the key support level of the ascending channel. Therefore, based on the technical analysis, we expect a bullish rebound affected by the ascending channel and take into consideration the appropriate Risk/Reward ratio; we suggest buying the pair today.
"Of note, breaking 1.6320 indicates failing the upside move and breaching the ascending channel, therefore extending the downside move."
"The pair dropped sharply yesterday confirming the negativity showing on momentum indicators. But trading remained limited above 1.6360 levels as the pair failed to break the key support level of the ascending channel. Therefore, based on the technical analysis, we expect a bullish rebound affected by the ascending channel and take into consideration the appropriate Risk/Reward ratio; we suggest buying the pair today.
"Of note, breaking 1.6320 indicates failing the upside move and breaching the ascending channel, therefore extending the downside move."
10:05: GBP/USD to 1.6622?
The British pound (GBP) has shrugged off today's soft inflation data and bullish technicals should ensure the currency is well bid.
"Fresh selling materialised and downside should be limited as bullish conditions are in place. Support should hold at 1.6317. Resistance is at 1.6517 ahead of 1.6622." - UBS.
"Fresh selling materialised and downside should be limited as bullish conditions are in place. Support should hold at 1.6317. Resistance is at 1.6517 ahead of 1.6622." - UBS.
09:35: Sterling Stable Despite Inflation Fall
Soft inflationary data was supposed to hurt Sterling.
Not so - we are seeing recent gains held across much of the market. EUR/GBP is however looking stubborn, we would expect this to be the case for a while.
Not so - we are seeing recent gains held across much of the market. EUR/GBP is however looking stubborn, we would expect this to be the case for a while.
09:30: Inflation Falls to Bank of England Target
UK inflation comes in at 2% vs consensus of 2.1%. The Bank of England's Inflation Target has been hit for the first time since November 2009!
"Softer inflation should revive specs on the bearish side"
"In UK, the Cable trades on mixed sentiment ahead of the CPI announcement due in the morning. The CPI y/y is expected to remain unchanged at 2.1% in December – a stone’s throw higher than BoE’s 2.0% target. Softer inflation should revive specs on the bearish side – giving more margin to BoE to hold its forward guidance / inflation knock-out framework. We see support at 1.6306/17 (50-dma & fibo 38.2% on Nov 13’ – Jan 14’ rally)." - Swissquote Bank.
More short-covering ahead
As sterling fell on Monday more traders were stopped out of the market which only compounded sterling's woes.
This could yet be a factor today warns UniCredit Bank:
"Broadly steady UK CPI data are not seen reversing yesterday’s GBP fall due to short-covering on both GBP-AUD and GBP-JPY. Cable and EUR-GBP may still trade below 1.64 and above 0.83, respectively."
This could yet be a factor today warns UniCredit Bank:
"Broadly steady UK CPI data are not seen reversing yesterday’s GBP fall due to short-covering on both GBP-AUD and GBP-JPY. Cable and EUR-GBP may still trade below 1.64 and above 0.83, respectively."
Inflation forecast to remain unchanged, a strong print should support Sterling
Lloyds Bank Research give their viewpoint ahead of today's inflation data release:
"Today, CPI numbers will be a focus. The market is expecting inflationary pressures to have remained unchanged in December; however, our economists view slight upside risks to today’s print. In reality a stronger number will have little bearing on monetary policy as general inflation pressures remain contained and is unlikely to trigger a breach of the forward guidance 'knockouts’, this underlines the MPC's dovish tone.
"However, a firmer print will likely provide some support for sterling. A weak print on the other hand will likely weigh on GBP. The year’s low of 1.6337 will likely provide initial support. While the recent dip in GBP maybe a decent buying opportunity, our economists highlight downside risks to retail sales later this week."
"Today, CPI numbers will be a focus. The market is expecting inflationary pressures to have remained unchanged in December; however, our economists view slight upside risks to today’s print. In reality a stronger number will have little bearing on monetary policy as general inflation pressures remain contained and is unlikely to trigger a breach of the forward guidance 'knockouts’, this underlines the MPC's dovish tone.
"However, a firmer print will likely provide some support for sterling. A weak print on the other hand will likely weigh on GBP. The year’s low of 1.6337 will likely provide initial support. While the recent dip in GBP maybe a decent buying opportunity, our economists highlight downside risks to retail sales later this week."
RBS see Bank of England lowering unemployment threshold
David Fenton at RBS says he thinks the Bank will lower their threshold unemployment target to below 7%. Such a move would be decisively negative for short- to medium-term sterling exchange rates:
"There are dangers on the horizon for the British pound in the form of the Bank of England. Analysts continue to speculate what actions will be taken to keep interest rates low for as long as possible.
"The most important development over the past month was the sharp fall in the unemployment rate: down to 7.4% in Aug-Oct, from 7.7% in May-Jul. The MPC will welcome this improvement, and the 250k new jobs that caused it, but not the effect that it has had on interest rate expectations.
"On the current trajectory, unemployment will reach the 7% forward guidance threshold in mid-2014 – two years earlier than initially expected. Markets are now anticipating the first rise in interest rates to occur in early 2015, which has helped push 10yr gilt yields back above 3%. We think the Bank of England (BoE) will try to rein in these expectations, possibly by lowering the unemployment threshold to 6.5%, or highlighting the other policy tools at its disposal."
"There are dangers on the horizon for the British pound in the form of the Bank of England. Analysts continue to speculate what actions will be taken to keep interest rates low for as long as possible.
"The most important development over the past month was the sharp fall in the unemployment rate: down to 7.4% in Aug-Oct, from 7.7% in May-Jul. The MPC will welcome this improvement, and the 250k new jobs that caused it, but not the effect that it has had on interest rate expectations.
"On the current trajectory, unemployment will reach the 7% forward guidance threshold in mid-2014 – two years earlier than initially expected. Markets are now anticipating the first rise in interest rates to occur in early 2015, which has helped push 10yr gilt yields back above 3%. We think the Bank of England (BoE) will try to rein in these expectations, possibly by lowering the unemployment threshold to 6.5%, or highlighting the other policy tools at its disposal."