The politics of the Pound v the Dollar and the Euro
11 December 2009
Sterling's politics v the Dollar and the Euro.
The Macro Trader's view:
This week's pre-budget report was, broadly speaking, a disappointment. It has been judged broadly fiscal neutral, with all the tough spending decisions deferred until after the General election due by May/June of next year, despite assurances to the contrary by Chancellor Darling.
The headline measure, a punitive tax on Banker's bonuses, is little more than a populist measure designed to please the Labour party faithful and assuage perceived public outrage over bonuses paid to a group of workers whose firms are only still in business because of a tax payer funded bailout.
Why then, is the Pound not under greater selling pressure? The ratings agencies, Moody's in particular, have questioned the sustainability of the UK's AAA sovereign credit rating. The implication is that without a credible deficit reduction plan, the rating could be lost, which would increase the cost of funding the public deficit and make reducing it even harder.
And although Darling claimed in the pre-budget report that the deficit will be halved over the next four years, the statement looks long on aspiration and short on explanation of how it is to be achieved.
In reality, the Chancellor is first and foremost a politician and retaining power is his priority. The ruling Labour party are seriously behind the opposition Conservative party in the opinion polls and look like leaving office after next year's election. The pre-budget report was never going to announce any measure that risked upsetting the already slim chance of re-election.
The markets seem to understand this and have decided that the Pound should be given the benefit of the doubt with only 5 or 6 months to go until a new government is elected. If Labour were unexpectedly to win they would raise tax as a means of cutting borrowing with spending cuts taking less of the strain. If the Conservatives win, they have declared that spending cuts will be their main route to cutting the deficit back sharply. The reason for the Pound’s resilience arises from the polls prediction that they will have a decent working majority.
Yet the Pound’s performances against the Euro and the Dollar are slightly different:
· Against the Euro it has remained within a broad trading range that has dominated since October, and although the Euro zone has already emerged from recession, there are negatives about Euro zone public finances too.
· Against the Dollar the Pound has weakened recently, and looks vulnerable to further selling.
Why the relative weakness against the Dollar (albeit slight) which has been weak itself for so long? The Dollar is currently enjoying a correction that is fuelled by lingering concerns over the Dubai debt rescheduling drama and a stronger-than-expected US non-farm payroll report released last Friday which aroused fears of an early turn in the US monetary policy cycle.
While that has been denied by Fed Chairman Bernanke, the markets are suspicious.
In any case, the US is out of recession whereas the UK is not.
The Technical Trader’s view:
Sterling v Dollar and Euro long-term
WEEKLY DOLLAR / STERLING CHART
In the long-term Cable chart the pressure on Sterling arises from repeated failure at a clear band of resistance
1.6802- 1.7020 throughout 2009.
But there is no completed Top yet in place (that requires a breakdown through 1.5709).
So the market is not immediately in the grip of a medium-term force.
(The modest support from the rising diagonal is being tested right now and may provide further clues.)
WEEKLY EURO/STERLING CHART
In the Euro/Sterling, the long-term chart shows the weakness of Sterling from mid 2009 to have arisen from the formation of a continuation pattern a bull falling wedge which completed in September this year.
(Of course, wedges are not the strongest of indicators.)
It would be much clearer for the Sterling bears if the possible Neckline above the market at 0.9380 were to be breached....completing a bull H&S pattern
Sterling v Dollar and Euro long-term
DAILY DOLLAR/STERLING CHART
Short-term, in Cable a small Head and Shoulders Reversal looks to have completed - though we need a confirming close beneath the neckline at 1.6294 today.
The minimum target of that pattern is more or less the critical Pivot at the Prior Low at 1.5709....
DAILY EURO/STERLING CHART
Short-term, against the Euro, the picture is strangely congruent with the long-term chart.
The market is again in the grip of a bull wedge (created, note well, by the solid support from the Prior High at 0.8838).
The Fibonacci 50% resistance may be proving troublesome, in any event, there is no very short-term pattern driving the market
Mark Sturdy
John Lewis
Seven Days Ahead
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