Sterling rally finally comes to an end by Richard Driver of Caxton FX on 22-May-2012

Whilst sterling remains strong against the commodity currencies, it has suffered somewhat against the euro and the US dollar in recent sessions. The Bank of England’s (BoE) Quarterly Inflation Report proved the catalyst for a significant bout of profit-taking on the pound’s rally. The Report saw the BoE downgrade its longer-term inflation and growth forecasts, sounding particularly dovish whilst doing so. Concerns over whether the BoE will introduce further quantitative easing have increased as a result, which has weighed on the pound significantly.

The week ahead brings with it plenty of risks for sterling. Wednesday’s minutes will bring BoE monetary policy back into focus – all eyes will be on how the MPC voted on QE in its May meeting. David Miles is likely to have stuck to his pro-QE stance and one or two others may well have been convinced by his arguments, which would be sterling-negative. Comments from the once reliably dovish Adam Posen have also added to QE bets. Posen publically questioned the wisdom of his decision not to vote for QE at the MPC’s May meeting, suggesting he can be counted on to do so again in coming months. Inflation data on Tuesday is highly likely to reveal that the headline rate has come down pretty sharply, once again bolstering arguments in favour of monetary easing.

Also on Wednesday, we have the release of April’s growth data from the UK’s retail sector. Having seen the wettest April since records began, the figure is expected to show a fairly sizeable contraction, particularly after the excellent growth seen in March. Thursday brings the revised UK GDP figure for the first quarter of this year. No amendment from the initial estimate of -0.2%, so the figure is unlikely to be a source of great support for the pound.

On the face of it then, it looks to be a tough week ahead for the pound. In addition to these domestic announcements, risk appetite away from safer currencies such as sterling looks to be staging a minor recovery. With the potentially disastrous effects of a Greek euro-exit now sunk in, if not fully priced in, we may well have seen the worst of investor panic. That is of course until the Greek elections come into view in the build up to the June 17th Greek elections. Sterling’s safe-haven demand looks set to come back to the fore ahead of this huge risk event.

G8 pledge support for Greece to remain within euro

The leaders of the world’s eight largest industrialised nations backed Greece to remain within the single currency. With Germany sticking to its demands for austerity though (and who can really blame them?), it’s difficult to see how the situation can lead to anything but a Greek default and euro-exit.

The profit-taking on sterling’s rally has taken the GBP / EUR down to its current level of €1.2350. It is difficult to see sterling losing too much more ground to the euro given the uncertainty that is lurking in June but with sterling facing several risky announcements this week, we may see today’s sideways trading theme dominate direction this week.

Against the US dollar, sterling continues to feel the heat and is now trading down at $1.58. We expect to see the USD maintain its current demand, though its recent rate of appreciation is clearly unsustainable. EUR / USD has staged a minor recovery, having touched a 4-month low around $1.2650. We are going to need to see further climb from the current level of $1.2770 towards $1.30 if we are to revise calls for much lower levels in coming weeks.

End of week forecast
GBP / EUR	1.23
GBP / USD	1.57
EUR / USD	1.27
GBP / AUD	1.60

Richard Driver is a Currency Market Analyst with Caxton FX and can be contacted via: www.caxtonfx.com

This brief is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Tweets by @biz_works