Market is Short Selling Sterling (GBP)

Sterling was under pressure yesterday morning but rallied in the afternoon and we would expect today’s data will need to be weak to produce further significant sterling losses. We are approaching some big retracement levels in both GBP/USD (1.4823) and EUR/GBP (0.8758), beyond which there is little obvious technical support for the pound, but with the market significantly short sterling, Lloyds LSB don’t believe there is currently enough of a bearish case for these levels to break given continued nerves about the Eurozone situation. Nevertheless, poor production and/or trade data today could see these levels tested, and while there is scope for a short covering rally there is still little reason to expect a proper reversal of GBP negative sentiment ahead of the Budget and MPC minutes on March 20.

Today’s releases include UK trade, industrial production and manufacturing output for January. Sterling’s recent decline is seen as a prerequisite for improving external competitiveness, and ultimately, rebalancing the economy. However, any positive effect on export volumes is unlikely to feed through in time for this month’s trade figures. Lloyds TSB expect the trade deficit to rise to £10.2bn from £8.9bn in December as sterling’s initial impact presses down on export values.

There is nothing of any significance on the European calendar today, but would expect EUR/USD to remain well supported below 1.30 for the near term. Yesterday’s weak French industrial production data and the Fitch downgrade of Italy didn’t really have any impact on forward points or peripheral spreads, and while this is the case there is a lack of credible drivers for renewed EUR weakness.

Today’s US NFIB data should be of interest, as this barometer of small business sentiment has lagged behind the ISMs which reflect the relative strength of large corporates. The lack of any real prospect of US monetary tightening in spite of the relatively decent recent data suggests the USD should be peaking here Lloyds TSB favour a modest retracement of recent gains.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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