A Mixed Outlook for the Sterling Spread Betting Market
Forex Analysis from Michael Hewson, Market Analyst, CMC Markets
6 January 2011
Sterling Trading Update
Around 12 months ago the outlook for sterling was not good. There was wide-spread concern about the credibility of the UK government and its refusal to outline a plan to deal with the fiscal deficit.
This reticence on the government’s part saw gilt yields well above 4% with the markets convinced that the UK was on course for a credit rating downgrade later in the year because of the government’s reluctance to talk about a credible plan to deal with the problems facing the UK.
However since May, and a new government, gilt yields have fallen dramatically and the pound has risen as the new government has set about tackling the markets concerns with a plan that appears to have kept the much maligned credit rating agencies at bay.
The sterling trade weighted index managed to end the year pretty much unchanged from when the year started, with the markets attentions still fixed on the Eurozone and the debt problems of the peripheral European nations.
The Bank of England has kept monetary policy unchanged amidst arguments for and against further quantitative easing, as well as calls for a rise in interest rates.
Certainly Q4 growth looks as if it may well disappoint due to the adverse weather seen in December this year, nevertheless we should still expect to see positive Q4 growth with a year on year figure in excess of 2.5%, which at the beginning of 2010 looked an unlikely probability.
Today’s contraction in construction PMI data to 49.1 bears out the headwinds facing the UK economy, but given the weather in December this figure shouldn’t have been too much of a surprise. It is of less significance than yesterday’s 16 year high in manufacturing PMI and tomorrow's services PMI data which is due out tomorrow, and makes up the lions share of the GDP calculation. The expectation is for the December figure to remain unchanged at 53.
However fiscal headwinds remain as a result of the government’s austerity program, not least the rise in VAT to 20% from January 2011 and the public spending cuts which will start to bite throughout this first quarter.
This is one of the arguments used by Adam Posen, member of the MPC for a further £50bn worth of quantitative easing, however there is currently no appetite within the MPC for further monetary stimulus, despite the Fed’s actions with further QE in November this year.
There had been an expectation that the Bank of England would follow the Fed in further stimulus on the basis that the Bank of England normally follows the Fed on policy. However in this case it is easy to see why the Bank of England is holding fire, given the current growth in the UK economy and the rate of inflationary pressures within it.
The current interest rates of 0.5% and the £200bn worth of quantitative easing look as if they could well remain unchanged throughout 2012, though risks of an interest rate rise have increased due to rising levels of inflation within the UK economy. The CBI has even warned the Bank of England that it may have to raise interest rates as early as Q2 2011, due to concerns that CPI could go near to 4%, much higher than the Bank of England’s own fiscal forecasts.
These fears of higher interest rates could well underpin the pound as we head into 2011 especially if CPI doesn’t fall back as quickly as the MPC think it will do.
Another variable that may affect the pound is the stability of the coalition government given the ferocity of the recent student protests against the student fees legislation which has just been passed.
A key test will be the May local elections where the Liberal Democrats could experience a populist backlash that could increase tensions within the government.
The GBP/USD rate looks to trade in a fairly stable range between the lows around $1.4230 this year, and the high $1.6000’s we saw in the latter part of 2010.
The trend line resistance from the highs at $1.7045 in 2009 at $1.6205 continues to cap the upside with slightly shorter term resistance around $1.5690 from the $1.6300 November highs.
A close below $1.5510 could well target a move towards the $1.5265 level which is a 50% retracement of the up move from the May lows at $1.4230 to the year’s at £1.6300.
In EUR/GBP, the sterling prognosis looks a little more positive with sovereign woes in Europe weighing on sentiment towards the single currency.
The rebound in the single currency saw it retrace 50% of its down move from the October highs at £0.8940 to its November lows at £0.8330; however the failure to push through £0.8640 has seen the euro slip back.
The break of trend line support yesterday at £0.8560 from its December lows shifts momentum back to the downside, but we would really need to see a move below £0.8485 and the 200 day MA to re-target the support level at £0.8450.
Below £0.8450 would then re-target the £0.8400 level on the way to a test of the November lows at £0.8330, and the possibility of a move towards trend line support from the £0.8065 lows at £0.8325.
Spread betting, CFDs and FX are leveraged products and carry a high level of risk to your capital. It is possible to lose more than your initial investment. These products may not be suitable for all investors, therefore ensure you understand the risks involved and seek independent advice if necessary.
Article provided / approved by CMC Markets UK plc / CMC Spreadbet plc which are authorised and regulated in the UK by the Financial Services Authority, registration numbers; 173730 and 170627 respectively.
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Spread betting, CFDs and FX are leveraged products and carry a high level of risk to your capital. It is possible to lose more than your initial investment. These products may not be suitable for all investors, therefore ensure you understand the risks involved and seek independent advice if necessary.
Article provided / approved by CMC Markets UK plc / CMC Spreadbet plc which are authorised and regulated in the UK by the Financial Services Authority, registration numbers; 173730 and 170627 respectively.
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'A Mixed Outlook for the Sterling Spread Betting Market' edited by DB, updated 06-Jan-11
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