Recently Sterling has not put a foot wrong in the currency market, with a plethora of positive fundamental economic data released from the UK and a general air of confidence alongside positive sentiment stemming from expectations that the UK economy may be returning to sustainable growth.
In a staunch turnaround in events last week Sterling began its downfall early with the release of the latest Inflation data. The ONS highlighted a reduction in the rate to 1.9%, from the Bank of England set target of 2%, and means that the BoE is more likely to maintain its easing programme which will put further pressure on the currency. The currency extended losses following the release of the latest BoE minutes mid-week, which indicated that UK policy makers are still against raising interest rates.
Sterling ended the week firmly on the back foot following Friday’s retail sales report, which indicated that retail sales dropped 1.5% in January against a forecast of 0.9%. This negative data all added to Sterling’s downward momentum. There is no discernible data from the UK released today so expect Sterling movements to be governed by events elsewhere.
The Euro witnessed a volatile week, before ending Friday on a high as the currency proved to be the best of a bad bunch of currencies, as the global economic recoveries seem to be stalling. In an indication of the state of the global economy, once again disappointing data took centre stage in the Eurozone. The latest PMI data indicated a drop to 52.7 in February from 52.9 in January prompting fears the economic growth witnessed in the region might come to a standstill.
ECB policy makers have firmly stated they are keeping options open with regard to further easing and other fiscal and monetary policy initiatives and further negative data is likely to force their hands. Influential data released from the Eurozone today includes German Ifo Business Climate at 9.00am followed by CPI y/y and Core CPI y/y at 10.00am. If the CPI data misses its mark analysts expect a year-end EUR/USD forecast of 1.2500 Interbank. But if the data print is positive short-term technicals will remain bullish and we expect to see a test up to 1.3800 Interbank.
The US Dollar has continued to lose ground against most major currency pairs, ending the week with the US Dollar index headed firmly south following negative existing home sales data. The prospect of commodity rallies are also weighing heavily on the currency due to the inverse relationship the greenback has to metals and oil, especially as Gold prices seem to be making a comeback.
The other largely influential factor weighing on the currency is the fact that the Federal Reserve will likely have to scale back its tapering program. The recent economic indicators have mostly surprised to the downside, leading many to believe the fragile US economy will need propping up for the foreseeable future. GBP/USD ended the week up to 1.6706 on the interbank market from the open at 1.6553. Support levels will be seen at 1.6485, 1.6526 and 1.6568, the pair will run into resistance at 1.6683, 1.6724 and 1.6766. There is no discernible data from the US released today.
Charlie Murray writes on behalf of London brokers, FC Exchange.
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