Can the British Pound Extend its Strong Advance Against US Dollar and Euro Today?

A largely positive week for sterling has seen the currency unwind recent losses against both the euro and US dollar, can the gains continue?

Pound sterling is looking to end the week on a high having recovered strongly from the oversold conditions it found itself in this time last week.

The market was technically over-extended in its agressive selling of sterling and the need for a correction was required. This has largely happened leaving us questioning whether further advances are possible.

Much will depend on how the US employment report due out later today reads.

The pound to dollar exchange rate bolted above the 1.41 area over the past 24 hours  thanks to some poor economic data releases out of the United States.

Just as markets were gearing up for further strength in US data they were met with news that Initial Jobless Claims data rose to 278K, more than the 271K expected.

This has got markets worried that Friday's all-important non-farm payrolls data will disappoint.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3347▲ + 0.15% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2893 - 1.2946
**Independent Specialist	1.316 - 1.3213 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The Sterling Recovery Could Continue Near-Term

Sterling has staged a recovery over the past few days, rising by 2% against the Dollar and almost 3% against the Euro as ‘Brexit’ fears appear to have eased somewhat.

We have been warning for a number of days that the GBP was oversold on the Brexit story and that risks concerning Brexit were now balanced to both the up and downside.

If you had headed DNB Market's suggestion last week that it was time to buy the pound following an exaggerated sell-off you would be sitting in profit today.

"The general oversold conditions and the recent pick-up in buying interest pave the way for a rebound," says Yann Quelenn at Swissquote Bank.

Hong Leong Bank say they are forecasting a move towards 1.42. In a strategy note to clients analysts explain:

"GBP remains slightly bullish against USD with scope for strong gains on US data disappointment. GBPUSD upside bias has firmed up and now looks more likely than not to challenge 1.4252. However, we caution that after recent advances, a dip lower first before extending the bounce must not be ruled out. Upside bias should prevail while above 1.4093."

Longer-Term, More Downside Likely

Nevertheless, momentum remains firmly pitted against sterling in the longer-term timeframes and we believe rallies will ultimately remain short-lived.

“The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64,” says Quelenn.

Analyst Joe Manimbo is also sceptical about the longer-term prospects of the strong recovery we are witnessing:

"Any bounce isn’t expected to get sterling far given the heavy weight of uncertainty ahead of Britain’s crucial EU vote which isn’t until the summer. Key catalysts loom for sterling in Thursday data on U.K. services growth which is forecast to slow, and America’s jobs report on Friday whose pace of monthly job creation is expected to strengthen."

UK Data Hints at Potential for Interest Rate Cuts

We are not convinced that the fundamental economic picture in the UK is now strong enough to prompt any major recovery in sterling.

In fact we are alarmed by recent developments and talk of the potential for interest rate cuts at the Bank of England.

The UK services PMI, released on Thursday, read at 52.7 for the month of February, well below analyst forecasts for a reading of 55.1.

At 52.7 the UK's dominant services sector, which accounts for 80% of the economy is sitting just above the boom and bust line at 50; below here and the sector is actually shrinking.

When added to the disappointments from the construction and manufacturing PMIs the message is clear - the UK economy is losing steam, and it is losing steam fast.

The big news though comes in the wake of the data with analysts starting to talk about the need to cut interest rates at the Bank of England.

“The extent of the slowdown will be a shock to policymakers and surely puts to bed any talk of the Bank of England raising interest rates," says Chris Williamson at Markit, "the focus will instead increasingly shift to whether policymakers may soon need to dig deeper into their toolbox to introduce new measures to shore up the economy with additional stimulus, and what tools might be used."

The prospect of interest rate cuts is incredibly negative for the pound and would almost certainly hasten the move to parity in the pound to euro exchange rate.

"With the services PMI historically having some predictive power in trailing changes in MPC policy sentiment, today’s report points to an increasing likelihood that some on the MPC – most likely Andy Haldane and Jan Vlieghe – may soon be tempted to vote for a cut in Bank Rate," says a flash note in response to the PMI numbers from Lloyds Bank.

Are we seeing the impact of uncertainty over the EU vote starting to feed into the real economy?

"The EU Referendum has started to bite. February’s services PMI fell to 52.7, its weakest showing since early 2013, largely due to slowing new business as market/global uncertainty and Brexit weighed on firms’ confidence," says Cristian Maggio, at TD Securities.

Other details in the report weren’t quite as bad as the headline suggests notes Maggio, "but momentum is clearly continuing to slow in the sector, and today’s print is consistent with no growth in the services sector in Feb."