The previous week’s problems have been superseded by swine flu. UK purchasing managers are more positive than most. Improved investor sentiment takes the shine off the dollar.
Having kicked off from $1.4550 last Monday the pound twice threatened to move lower before it began its rally on Tuesday. It hesitated on Thursday at $1.4950, dipping a cent and a half before regaining its upward momentum. Another one cent correction on bank holiday Monday set it up for an attack on technical and psychological resistance at $1.50. When London opened this morning the pound was doing its best to break above the $1.5050 high established in mid-April.
It took a surprisingly short time for sterling to shake off the previous week’s depression. By Monday morning the budget and the alleged potential downgrade of UK sovereign debt had lost their place in the headlines, replaced by the swine flu pandemic. Investors tried to get their heads around the implications of a disease that could kill every man, woman and child in the galaxy. In a triumph for commonsense it only took the market a couple of days to come to two conclusions: Swine flu was nowhere near as lethal as HIV, SARS, MRSA or malaria, and there would be no such thing as a “safe” currency in an extinction event.
With their eye back on the ball, investors looked at the data and decided they were not so bearish about sterling after all. The Confederation of British Industry’s Distributive Trades Survey was a particularly positive surprise. On a scale of -100 to +100 the balance came in at +3, a huge 47 points higher than the previous month. It was the most positive outcome since January last year. A more optimistic attitude among consumers was confirmed by Gfk’s index of consumer confidence. Although still well into negative territory it rose for a third consecutive month. The third bonus came with Friday’s manufacturing sector Purchasing Managers’ Index. It went up by another three and a half points to 42.9 in March, maintaining its lead over equivalent measures from Euroland and the United States.
The dollar was handicapped as much by sentiment as by any economic developments. Once they had shrugged off the threat of Aporkalypse, financial markets everywhere reflected a positive tone that favoured riskier investments and currencies. Equities moved higher everywhere and safe-haven currencies such as the dollar were left behind.
US data themselves were by and large better, but not by enough to overshadow similar improvements elsewhere. Consumer confidence was higher on two fronts: The Conference Board’s measure went up by more than ten points to 39.2 and the University of Michigan logged a three point improvement to 65.1. The first take on overall economic performance during the first quarter of the year showed an annualised 6.1% contraction. That translates to a quarterly performance of -1.6%, similar to what happened in Q4 and better than Britain’s -1.9% for the same three months.
The latest real estate data cancelled each other out. Although optimists latched onto the 3.2% increase in pending home sales the average value of those transactions continues to fall at a rate of 18.6% a year. The same was true of the weekly unemployment numbers: new jobless claims were down while continuing claims continued to rise.
The slightly erratic Chicago Purchasing Managers’ Index jumped by eight and a half points to 40.1. The national measure also came in at 40.1 but in that case the improvement was less than half as much. Core personal consumption expenditure, an inflation measure watched closely by the Federal Reserve, was in line with forecasts at +1.8% in the year to March.
The near term outlook for sterling will depend very much on how the pound handles the technical obstacle at $1.50. Not only is it an obvious psychological barrier, it is also a chart barrier after three failures at that level this year. On Monday morning it looked as though sterling might at last be able to push ahead but previous experience tells us to beware of setbacks. Buyers of the dollar should consider using this spike to build their position, increasing the size of their hedge above 50%. Yes, the pound could break through the chart resistance and soar to untold heights but the usual caveat applies: this is sterling we are talking about.
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