INVESTICA LTD ^{Understanding Markets}

Please add to your favourites       Daily strategy  02-09-10 -  Sterling remains vulnerable

Sterling found support on dips to 1.5320 on Wednesday and rallied to a high at 1.55 as risk appetite improved and the dollar faltered. Sterling was unable to sustain the gains and was back on the defensive during Thursday. Underlying confidence in the UK economy is liable to deteriorate, especially with unease over the housing sector likely to increase after a batch of poor data. Given global growth doubts, the UK will find it very difficult to find a source of growth which will undermine the currency. Trends in risk appetite will remain important and the net tone is likely to be caution despite intermittent improvements in sentiment. Overall, there is scope for a renewed test of 1.5320 and a decline to the 1.5250 area against the dollar this week.

Euro/dollar: 

The Euro has advanced strongly over the past 24 hours with a peak above 1.3220 in early Europe on Tuesday. The Euro will continue to gain near-term support from improved risk appetite and hopes that Euro-zone difficulties have eased.  There will also be persistent doubts over the US economy and speculation that the Federal Reserve will adopt further monetary easing next week is potentially very damaging for the dollar. An easing of liquidity fears will also lessen US currency demand. If doubts over the US economy increase, then confidence in the global economy is also likely to deteriorate and this will represent an important threat to underlying risk appetite over the next few weeks. There will be dollar momentum selling, but the Euro is likely to stall in the 1.3250 area as underlying fears surrounding the Euro-zone and global economy are liable to return relatively quickly. 

Sterling:

Sterling continued to advance and take advantage of the US vulnerability over the past 24 hours with a high just above 1.5950 against the dollar in Europe on Tuesday. Confidence in the UK economy can remain firmer in the near term, but there are still very important risks which should not be ignored and fears are liable to increase again over the next few weeks. Trends in risk appetite will remain important and Sterling will gain immediate support from increased confidence. Overall, there are still very important domestic and international risks and Sterling selling pressure is liable to increase above the 1.60 region against the dollar with the currency offering very little value at current levels against the US currency.

Yen:  

The dollar has lost support on yield grounds which will tend to maintain the potential for selling pressure on the US currency. Policy actions by the Bank of Japan and Finance Ministry will remain very important and there will be strong speculation of action to curb yen gains if there is a dollar retreat to the 85 area. The yen will also tend to lose some support when there is an improvement in international risk appetite. It looks increasingly likely that markets will want to test the official stance at the 85 area, but yen buying makes little sense at current levels.