Since October’s surprise decision by the Bank of England to embark on a larger than expected £75bn worth of asset purchases, sterling has surprised by rallying about 2.5% against a basket of currencies on the forex spread betting markets.
This rally has been largely helped by the deteriorating situation in the Eurozone as the UK gets the benefit of the doubt from investors looking for a relative safe haven from the turmoil in Europe. In addition we have also seen a flow of cash out of European bond markets.
Whether this will continue remains to be seen but, with a deteriorating growth and unemployment outlook that is likely to be confirmed by this week’s economic data, the current rally is starting to look a little questionable.
This is particularly noticeable on a long term basis, where there is trend line resistance at 80.30 from the 2009 highs around 84.75, currently capping upward momentum in the sterling trade weighted index.
As such the prognosis on the spread betting markets remains for limited sterling gains and possible sterling weakness on a trade weighted basis. However, against the single currency there maybe room for some further progress, especially if the European situation continues to deteriorate, which seems quite likely, as sentiment in Europe continues to crater.
Forex Spread Betting: Bank of England Monetary Policy
Despite the Bank of England monetary policy committee's optimism that inflation in the UK is likely to fall back over the next two years, it is hard to set too much stock by their analysis. The committee has been consistently wrong about pricing pressures over the last three years.
This is especially true given that the Bank’s current policy of asset purchases in no way addresses the underlying issues affecting the UK economy. Printing ever more money is unlikely to generate anywhere enough, if any, growth to sustain a recovery.
This lack of any recovery will be largely as a result of the continued high levels of household debt. Unless bankers have come up with a magical formula to make that debt disappear, weakness will continue in what remains a largely consumer and services driven UK economy.
This week’s inflation data has once more shown that inflation remains high, with core prices increasing from 3.3% to 3.4%, further eroding disposable incomes.
CPI came in at 5% in October, despite a slight softening of prices from the previous month of 5.2%. This is still expected to remain elevated for some months to come, even if it does come down in line with Bank of England estimates.
Furthermore the Bank of England inflation report tomorrow is set to see the bank downgrade its expectations about UK growth once again, in line with recent downgrades from the IMF and OECD. These will be revised from its August figures of 1.5%, to just 1% for this year and it is also likely to downgrade next years forecast as well to around the same level.
Set against such an anaemic economic backdrop, the Bank could well further increase it's asset purchase program in the coming months, with all the risks that would entail for further sterling weakness and rising price pressures.
The release of unemployment data later this week, which is expected to show an increase to 8.2%, and retail sales figures for October, is expected to reinforce the bleak economic outlook. Consumer spending is set to remain weak with expectations for a decline of 0.3% down from September’s 0.6% rise.
Forex Spread Betting: Weak UK Growth
An additional factor that could also weigh on sterling into next year could be the risk of a ratings downgrade in the event the economy continues to exhibit its lacklustre performance of the last two months. There are fears that Q4 could well see a slip back into negative territory for growth.
As such UK spread betting markets are likely to look closely at this month’s Autumn Statement for any signs of wavering in the Coalition government’s determination to tackle the current deficit. In addition, they will also be looking for new measures to stimulate business growth in the private and small business sector.
If Q1 of 2012 continues to show the same lacklustre characteristics as the last couple of months, expect to see renewed concerns about the sustainability of the UK’s rating, especially if Europe continues to drag on exports.
Forex Spread Betting: GBP/USD Analysis
Against the US dollar the key resistance for the sterling - dollar spread betting market lies at $1.6130 and the 200 day MA, the blue line on the daily GBP/USD chart below. This has capped every rally so far since the rise off the post QE lows at $1.5270.
Forex analysis suggests that the pound is currently trading lower in a corrective downward channel with resistance at $1.6080.
A move back below the $1.5870 area has the potential to retarget the $1.5720 area, which would be a 50% retracement of the entire up move from the post QE2 lows at $1.5270 to the recent highs at $1.6170.
Forex Spread Betting: EUR/GBP Analysis
Against the single currency, sterling failed to close below the £0.8530/50 level, which is the blue 200 week MA on the EUR/GBP chart below, last week.
This, combined with closing above the range lows for the past month, despite a dip to £0.8485 last week, keeps the risk for a rebound back towards £0.8650. However, while below this resistance, further sterling gains seem likely.
A weekly close below £0.8530/50 could well open up a move towards trend line support at £0.8375 from the October 2008 lows at £0.7695.
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Original article written by CMC Markets as of 14 November 2011.
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'Forex Spread Betting: Sterling Struggles on Weaker UK Economic Outlook' edited by DB, updated 15-Nov-11
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