FX Market Update 13th October 2010
Today we have seen another day of continuation of trend. There is clear resistance in the market halting a GBP/USD break through 1.60 and EUR/USD at the psychological level of 1.40. The global stock markets have rallied 1% in the US and 1.7% in the UK. Sterling is the worst performer loosing a significant amount of ground against all of the majors, undermined by talk from the BoE edging us ever closer to the next bout of QE. GBP/EUR hit a fresh low at 1.1316 in afternoon trade and looks set at the moment to continue down to 1.10.
Unfortunately there are conflicting arguments in the markets surrounding the UK economy and what ‘could’ happen and ‘should’ be done. The primary concern for the BoE is to avoid slipping into another recession by keeping the economy buyoant and improving liquidity through QE measures. They may also want a weak pound to help with the exports and boost GDP.
The problem is that at the same time they are introducing austerity measures set to reign in the UK budget deficit to more palatable figures in the next few years. This has been attempted in Italy and Ireland and their economies are in ruins. The fear is that the upcoming austerity measures could actually cause a double dip recession.
The next contradiction is the BoE are advocates for price stability. The UK inflation rate is over 3% and could spiral out of control if additional QE stimulus is used to keep the economy going. This could lead to a financial meltdown in the markets if interest rates have to be raised quickly in the next few years to control spiraling inflation. In reality the BoE are dealing with a very difficult situation and are walking a tight rope to keep everything in check.
Support and Resistance
GBP/USD – Resistance 1.6018 / Support 1.5754
GBP/EUR – Resistance 1.1717 / Support 1.13-1.1320
EU-16 – ECB Monthely Bulletin 0900
IRL – CPI 1100
US – Initial Jobless Claims 1330
US – International Trade Balance (August) 1330
US – PPI (September) 1330
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