Sterling Hit By Charts and Politics

By Moneycorp

Technical resistance and Downing Street unrest took their toll on sterling despite decent economic data. Unusually, the dollar reacted strongly to better-than-expected employment figures.

A promising start to the week took sterling up from $1.63 on Monday morning to a high of $1.6650 on Wednesday, whereupon the wheels came off in no uncertain fashion. Sterling went straight back to $1.63, hesitated, then carried on lower. By the end of the week it was down to $1.60 and it opened a cent lower than that this morning at $1.59.

The economic data continued to favour sterling at the beginning of the week. Once again Britain led the way in the Purchasing Managers’ Index stakes with the UK manufacturing PMI rising nearly two points to 45.4. The US measure also improved, to 42.8, but was still adrift.

It was even better news on Wednesday with the services sector PMIs. Investors had been looking for a one-point improvement to 49.5. What they got was a three-point increase to 51.7, putting the services PMI in the expansion zone for the first time since April last year. The equivalent US figure was just 44. And what was the reaction of investors to this outstanding news? Why, of course they sold the pound. Sterling/dollar’s seven-month high coincided precisely with the announcement, suggesting that speculators had used the good figure to offload their long positions.

There was more grief for sterling on Thursday. A rumour that the prime minister was resigning was closely followed by a denial from Downing Street. It is unclear which story did the most damage but the combined exercise cost the pound three cents in as many minutes.

Friday brought an unusual development. For many weeks the dollar, like the yen and to a lesser extent the Swiss franc, has been treated as a safe-haven currency. When investors were nervous they bought it. When they felt more relaxed – for example when the global economy felt less of a worry – they sold it. That attitude had peculiar consequences for the dollar: Stronger-than-expected US data worked not in favour of the currency but against it, because they improved investors’ confidence.

That logic went for a ball of chalk at the end of the week. The US Bureau of Labor’s monthly employment report on the first Friday of every month includes arguably the most market-moving statistic of them all: Non-Farm Payrolls. Analysts had been forecasting a 17th successive fall in payrolls, this time to the tune of about 520,000 jobs. Investors were geared up for half a million job losses so when they saw that “only” 345,000 jobs had gone, and that the previous month’s figure was better by 35,000, they were pleasantly surprised.

So pleasant was the surprise that the dollar did what it has not done for a long time; it responded positively to a positive (okay, less negative) number. In the 15 minutes following the announcement cable slumped by more than three cents, wiping out the morning’s gains. It is too early to identify this as a sea change in the market’s perception of the US currency or an abandonment of the philosophy that equates general economic well-being with a reduced need for safe-havens. Nevertheless, that is exactly what it appears to be.

The combination of technical resistance, politics and a possible change in attitude has put sterling on the defensive, at least against the US dollar. Readers who took the precaution of placing a stop order will have had their order filled above $1.60. Other buyers of the dollar will be hoping that technical support in the region of $1.58 holds firm. They should stick to the classic strategy of locking into a price for half their requirement and watching closely to see whether or not last Friday’s better data = stronger dollar equation is a flash in the pan.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t forget to mention International Horizons to secure the best rates. Alternatively go to the Moneycorp Website where you can open a free, no obligation Trading Facility.

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