Has Sterlings steam run out already

25 October, 2016

Rob Bastin

Yesterday was a particularly flat day in the currency markets with most major pairs trading within small ranges. Sterling had a quiet day with no releases to help boost its value, so instead small losses were seen against the Euro and US Dollar as rates sit just below key resistance levels. Given that the pound has gained over 3 cents against the Euro in less than 2 weeks, there is a very strong chance that this resistance holds firm and that the downward trend resumes before long. Any further gains will for sure need another positive catalysts from one of the key events in the next week or 2. Q3 growth figures are announced on Thursday and the Bank of England meet next Thursday with their latest interest rate decision. For sterling’s recovery to push any further we would likely need to see strong growth figures on Thursday, and for the Bank of England to hold off on any further stimulus. Even with this best case scenario we would likely see limited and short lived gains given the intact downward trend and concerns over the ongoing Brexit negotiations..

Market expectations unfortunately do not currently favour this possibility with growth expected to have shrunk significantly since the referendum vote, and with the Bank of England expected by many analysts to implement another small rate cut between 0.1-0.2% at November’s meeting. This risk based analysis makes the current buying levels very attractive, despite the comparatively low levels.

Data yesterday was focussed on the Euro-zone, and once again all figure surpassed expectations and this helped the Euro recover some of its recent losses against the Pound and US Dollar. Manufacturing, Services and Composite PMI all posted better than expected growth figures, increasing the rate of growth further from the previous month. The day ahead is another quiet one but with one potential banana skin for Sterling as Mark Carney is due to speak at 2:30pm this afternoon, and his words have hardly been Sterling supportive of late. US Consumer Confidence is also due this afternoon at 3pm with a slight drop expected in the month of October.