Moneycorp: Euro Weekly Update
June 10th, 2009
Sterling hit by charts and politics: Technical resistance and Downing Street unrest took their toll on sterling despite decent economic data. The euro advanced by default rather than by design.
A promising start to the week took sterling up from €1.15 on Monday morning to a high of €1.1650 on Wednesday, whereupon it all went sour. A rapid two-cent fall at that point was followed by more damage on Thursday and the pound began Friday below €1.13. Investors have been surprisingly kind to the pound since then and it opened in London this morning at €1.14.
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 Euro zone measure also improved, to 40.7, but was still adrift. The German figure was well behind at 39.6.
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 UK services PMI in the expansion zone for the first time since April last year. The equivalent Euro zone figure was seven points behind. And what was the reaction of investors to this outstanding news? Why, of course they sold the pound. Sterling/euro’s six 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.
Beyond the PMI figures the Euro zone had little to say for itself apart from a modest 0.2% retail sales uptick in April that left the overall level still 2.3% lower than a year earlier. In Euroland, as in Britain, the central bank decided against adjusting its policy interest rate, preferring still to go down the “quantitative easing” route and buying covered bonds (or, in the case of the Bank of England, gilts).
The combination of technical resistance and politics has put sterling on the defensive, particularly against the US dollar but also against the euro. The big risk is clearly politics and not, at least for the moment, economics. New Labour has been slaughtered at the European and local government elections and there has been a similar, broadly anti-left, backlash throughout Europe.
If Mr Brown finds himself with another wobbly cabinet the market may again take it upon itself to teach sterling a lesson. Buyers of the euro Buyers of the euro should place a protective stop order in case of disaster but otherwise look for the pound eventually to break above its current constraints.
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