Sterling Scuppered By Frist Quarter GDP

By Moneycorp

STERLING SCUPPERED BY FIRST QUARTER GDP Downward revision to Q1 growth scares investors. Weak consumer confidence and big job losses help US dollar.

A strong rally at the beginning of the week was followed by an even sharper return to base on Tuesday. After only a little hesitation the pound embarked on a downward path that saw it end the week at $1.63. The sellers were at it again this morning and sterling opened in London at $1.6150, three cents lower than last Monday morning.

The clear and obvious culprit for sterling’s decline last week was the final revision to first quarter Gross Domestic Product on Tuesday. After the modest upward revision to the US figure a week earlier investors had got it into their heads that the UK figure would receive the same positive treatment. The more optimistic among them had bought sterling in anticipation of a figure better than the -1.9% quarterly change that had been estimated previously. The realists were primed for disaster and began to sell sterling even before the announcement. When everyone saw that -1.9% had changed into -2.4% they threw up their hands in horror (even though these numbers relate to stuff that finished happening three months ago). Sterling came under immediate pressure.

The Purchasing Managers’ Index for Britain’s manufacturing sector on Wednesday was better than expected at 47. Friday’s services PMI was in the growth zone at 51.6. Compared to the US and Euro zone opposition they were good figures. Yet neither was enough to reverse the negative sentiment that had set in after the GDP numbers.

The US dollar had an inconclusive week on most fronts, at least until Friday. For the first three days of the week it was softer against the euro and the yen, handicapped by the lack of truly bad US economic data. Nowadays, signs of strength from the States are a marker against the dollar: only when the going gets tough do investors plough their money back into the “safety” of the dollar.

The first whiff of hope came with an unexpected fall in consumer confidence. The Conference Board reported a four and a half point drop to 49.3 on Tuesday, setting the tone for a dollar recovery. The manufacturing PMI was totally unhelpful, rising from 42.8 to 48.8 and with its 4.6% annual increase the pending home sales number was of no use whatsoever. What really got the dollar going was Thursday’s mega-stat, Non-farm Payrolls. The loss of 467,000 jobs in June was much worse than the -365k that analysts had forecast. Equities went down and the dollar went up.

Having held firm four weeks ago the technical support at $1.58 should still be solid but is getting rapidly closer. The resistance at $1.67 is irrelevant with the market in its current mood. The possibility of any quick upside break above $1.67 evaporated with Tuesday’s retreat. Buyers of the dollar should place a stop order somewhere south of $1.58 and be patient. The cautious strategy, as ever, is to buy now half the dollars you will need. If you feel comfortable in doing so, leave a larger percentage uncovered in anticipation of a renewed rally but do not forget that stop order.

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 rate. Alternatively go to the Moneycorp website where you can open a free, no obligation Trading Facility.

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