6th March - How good is Sterling - Market updates

6th March - How good is Sterling

11 March 2014

TECHNICALS:

Monthly chart

The long-term chart tells the story of the completion of a powerful continuation triangle driving the market better..

Daily Cable chart

The short-term price action suggests that the market is well underpinned – note the support at the band 1.6603/1.6667

FUNDAMENTALS:

The strong UK economic performance throughout 2013 offered the Pound solid support and was the main dynamic behind its steady rally. And even as the severe winter storms battered much of the UK relentlessly throughout the winter causing wide spread flooding which threatens to slow Q1 GDP, the Pound has held up well.

Compare the UK economy to the Euro zone with its worryingly low inflation and very weak recovery and the reasons become clearer. Even against the Dollar ,the Pound has performed very well and still looks bullish.

As in the UK, the US too has endured months of severe winter storms with heavy snow fall and record low temperatures over much of the country and this has been largely responsible for the soft patch currently hitting US growth and weighing on the Dollar.

But of greater interest is the strength of Sterling in recent weeks especially against the Dollar. As the Ukraine crisis deepened, one could have expected the Dollar to benefit from safe-haven buying ,given the Ukraine’s geographic location right on the eastern borders of the EU.

Add in Europe’s reliance on Russian natural gas and the potential for Russia to use that as a weapon to quell dissent from Europe over its de facto invasion of Ukrainian territory and the Dollar’s current price action makes it look all the more bearish.

Focussing on the Pound, especially against the Dollar, Sterling looks set to rally further.

There are several factors in the Pounds favour:

1.UK economic growth looks set to remain strong despite the weather and will pick up as the rebuilding gets under way and the weather improves,

2.The UK is less dependant on Russian energy than the rest of the EU/Europe,

3.The geographical location of the UK makes Russian expansion into her former Soviet satellites less of a threat, and

4.The Cameron administration has already demonstrated that it is not prepared to follow the US into every foreign policy adventure, as shown over the refusal to use force against Syria.

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In short we expect the Pound to perform well in any one of several scenarios:

•If the crisis in Ukraine is peacefully resolved, the focus will return to economic activity and here the Pound is at an advantage.

•If the crisis deepens further with sanctions imposed against Russia for further violations of Ukraine Sovereignty, we judge the Pound will benefit from the above and a degree of safe haven buying, and

•If the crisis were unfortunately to become a full scale armed conflict between Russian and Ukraine forces with the west imposing wide ranging sanctions against Russia, we think the Pound will still rally against the Dollar, as the principle flash points would be between the US and Russia, with the Euro zone recovery potentially hit by Russian retaliation via either cutting off gas supplies or price hikes.

The outlook then for Sterling is for a continued recovery back from the lows recorded as a result of the financial crisis/ recession, as the UK economy has surprised most forecasters and staged a deeper and more rigorous recovery than any one had dared hoped for just one year earlier.

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14th Mar - Copper Bears Threaten Long Term Support

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10th Mar - EUR/GBP Still Holds Near 61.8% Support

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