Sterling falls further as data concerns grow

Sterling at Dec. ’17 level

From being one of the best performing currencies in Q1, the pound has become the “sick man” of the currency market. Sentiment is now determining that even if it were able to rally from its current level, traders see the issues facing the UK economy from Brexit and monetary policy as reasons to now sell into any rally since those issues facing the UK are long term and structural.

The pound fell again yesterday trading below 1.3400 versus the dollar for the first time in 2018. It reached a low of 1.3391 before staging a slight recovery as day traders covered short positions, closing at 1.3425. Overnight the fall has continued with a low of 1.3414 (06.30BST) being seen.

This week’s data releases; inflation tomorrow and GDP on Friday are being billed as crucial to the prospect of another rate hike in 2018. Inflation probably won’t have fallen by as much as it did in March, but the data will be encouraging as it continues to move back towards the target of 2%, although that doesn’t bode well for a tightening of monetary policy.

Friday’s Q1 growth report on the other hand is unlikely to provide any encouragement as the UK economy will probably struggle to register any growth at all with analysts expecting a QoQ rise of just 0.2%.

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Dollar rally now based on sentiment

The recent rise in the value of the dollar, which broke through strong resistance at 93.50 on Friday, has now become based primarily on market sentiment as the positive factors that led to the initial rally fade. The dollar has also been boosted by the falls in the value of the constituents of the dollar index.

The greenback has surged by a little over 5% in a month as other G7 currencies have been firmly on the back foot providing the dollar with a strong headwind which is now beginning to fade.

Yesterday the dollar index fell back towards what will now be support at 93.50, making a low of 93.47. The yield on ten-year Government debt also fell a little from recent levels, encouraging a certain amount of profit taking on long dollar positions.

Tomorrow’s release of minutes from the FOMC meeting which was held in the first week of the month are now a little out of date, but traders will still be interested to understand a little of the feelings of members on the longer-term outlook for monetary policy and their view on the source and direction of inflation.

Euro finding a foothold

The rate of the fall in the value of the Euro has abated somewhat as traders come to terms with what to expect from the new Italian Government. The policies of the new coalition will be considered radical and the proposal to lower taxes and increase public spending flies in the face of the austerity being promoted by Brussels considering the huge debt overhang and possibility of a banking crisis still facing the country.

The Italian people voted for a change from the old, corrupt, ways but if it leads to further crisis, the coalition between Five Star and League could quickly disintegrate.

There has been no word yet from Brussels since it appears they prefer to wait for the Government and Prime Minister to be confirmed as then they will have a clearer idea about what it is facing.

The single currency steadied a little yesterday albeit at a lower level, which suits the ECB. It reached a high of 1.1796 having traded as low as 1.1716 before rallying. The outlook for the currency is still linked to the prospect of a continued rally for the dollar but should the Italian situation worsen, then 1.1680 is the next technical support level.