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Cable shock! Sterling bounces… will it

15 May 2009

The Technical Trader’s view:

The collapse of Sterling first, down through the support at 1.7365 and then down through the rising diagonal at 1.53 or so came to an abrupt halt at the Prior Low Pivot at 1.3866. Twice the market tried to get down through there. And then it bounced.

That bounce has just enough structure to it to encourage the thought that a Double Bottom may have been completed. Completion level – now support 1.4981.

But this is less compelling for the bulls. If 1.4981 is important support (and it should be if the market is bullish) then we must also consider the possibility that 1.5275 is good resistance. So, though the bounce is clear, and impressive, the short-term prospects are cloudy. (Note too, in the monthly chart, that the market is pressing up against the resistance from the broken diagonal above the market.)

Don’t be beguiled. Stand aside.

The Macro Trader’s view:

Since making a low on January 23rd, Cable has slowly but surely rallied. Initially the rally was viewed as a correction after a sharp selloff which saw the Pound fall from highs above $2.0000 because economists forecasted the UK economy would be the worst affected among the G7 economies.

And although the US economy was experiencing a particularly nasty recession of its own, led by a collapse in the housing market which provoked a credit crisis via the now infamous subprime lending market, the UK economy to many looked the most vulnerable, as much of its recent prosperity had been build, or perceived to have been built, on the success of the City
and wealth generated by financial services (which actually only amounted to 8.0% of GDP). But it has become clear over recent months that the Japanese and Euro zone economies, once thought less vulnerable to a deep recession, are fairing every bit as badly if not worse than the UK. The Japanese economy is now suffering its worst recession since WW11, as exports have
collapsed. The German economy, the Euro zone’s largest, has also seen industrial production collapse as factory orders etc have also slumped heavily, leaving the Euro zone economy facing a deeper downturn than the UK.

Moreover, despite yesterday’s Bank of England quarterly inflation report, which forecast a gloomier outlook than its previous report in February ( the recession now expected to extend into 2010 and inflation not falling as far as previously thought, albeit still below target during the 2 year forecast period) economic data has started to turn. Last week saw a much stronger-than-expected PMI Services survey at 48.7, only a whisker away from recording economic expansion. Before that, a week earlier, retail sales came in stronger too. So yesterday’s Bank of England inflation report already looks out of step with current economic data. However, growth is not the only story behind Sterling’s recent weakness. The sharp and unprecedented peacetime deterioration of the Public finances caused many to lose confidence
in the UK economy also led to the weak Pound.
But again other countries have also been forced to allow their fiscal stance to deteriorate by pumping money into their economies and Banking systems in an attempt to avert a 1930’s style slump. The US is set to run a massive $1.8T budget deficit this year and for the foreseeable future.
This has caused a re-appraisal of the UK’S position relative to the other leading developed economies. Clearly growth in the UK is not now going to be the worst in the G7, and while the public finances are a mess, if current data is accurate the economy has bottomed with recovery likely sooner than originally thought and the public finances may turn out a little better
than feared.

So the Pound’s recent recovery against the Dollar now looks more like a re-assessment of relative strengths, rather than a brief recovery. How much further it rallies from here depends on the run of data over the coming weeks and months.

Mark Sturdy,
John Lewis
Seven Days Ahead

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