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Short Sterling poised for action...

25 July 2008

The Technical Trader’s view:

Daily Jun 08 Chart

The market is poised.

A push up through the possible. Neckline at 94.4950 would be a powerful boost to the bulls.

A simultaneous break of the resistance from the prior Lows at 94.4350.

The minimum target? 95.55 or thereabouts. (More or less the old highs.)

There’s some resistance above the market at 94.67... but if the H&S pattern completes that shouldn’t get in the way too much...

The Macro Trader’s view:

On Wednesday the MPC minutes for the July meeting left the market with the understanding that a rate hike could be coming in August. The vote was split 7-1-1 with the majority voting for unchanged, one for a cut and one for an immediate hike.

Additionally, the debate seemed to have revolved around whether policy should be tightened. The decision to leave rates unchanged was made based on two considerations:

- To move in July would have upset the market as unchanged was expected, and

- The outlook for growth had deteriorated further, meaning just by leaving rates at 5.0% in such an environment showed a commitment to fighting inflation, which was now looking to rise beyond the Bank’s own forecast.

While this appeared as ‘tough love’ for an economy expected to contract, with the last retail sales report showing annual growth at 8.1%, their tone was understandable, especially if the next retail sales report showed similar resilience.

In the event, retail sales released on Thursday more than reversed the previous month’s gains. The monthly reading was -3.9% and the annual reading dropped sharply to 2.2% - readings that seem more in line with reports issued by retailers themselves.

Although we had expected yesterday’s report to have a greater impact on Q2 GDP, we judge the next release of that data will more accurately reflect the obvious weakness in retail sales.

The clear slowdown underway in the economy, is evident in all sectors:

- The housing market,

- Manufacturing, and now

- Retailing.

We judge the MPC will not hike interest rates in August despite the comment in the July minutes which said “any change would be better communicated at the time of the August inflation report”.

We interpreted this at the time as not necessarily meaning a rate hike as most traders did, and after yesterday’s retail sales report a rate cut remains a possibility.

Hiking rates now , with the economy clearly slowing fast would just heap additional un-necessary pain on everyone as inflation will ease as the economy slows. And although the main source of inflation is from energy, commodities and food, a cooling economy will force domestically-generated inflation much lower; acting as an offset, and with the US and Euro zone flirting with a substantial slowdown, oil prices could yet fall further.

The outlook for Short Sterling is changing, it has been excessively bearish; now the Bulls may begin to take control.

Mark Sturdy

John Lewis

Seven Days Ahead

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