We are having a hard time understanding why sterling is holding up so well,

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The US Dollar exchange rate continued to gain against the euro rate to about mid-day yesterday in New York on the European bank story, but the power of the story had faded by the close. Overnight as Asia was handing off to Europe, some euro bulls tried a push to the upside, but it failed to go very far - only 1.2640 from the US closing low of 1.2556. Market News reports somewhat cryptically that "Early (euro) dips met with demand from a major German name and a semi-official entity, though this proved insufficient to halt further slippage as strong cable sales helped to drag euros to dollars lower." We take this to mean that the euro's bounce is merely a minor correction and doesn’t signal a change in sentiment.

Sterling is buffeted by opposing forces, including the Bank of England seeking permission to expand money supply to buy government paper and the minutes of the last meeting showing that the 50 bp rate cut would have been 100 bp if Blanchflower had had his way. The Policy Committee voted unanimously to ask for the power to carry out quantitative easing (buying government paper), which it is already doing - pretty darn fast for a government agency. We are having a hard time understanding why sterling is holding up so well, relatively speaking, in a flattish range of 1.4100 to 1.4300. It’s well off last week's weird high over 1.4600 but why is it not breaking 1.4000?

Evidently because the euro exchange rate looks worse.

The dollar/yen (and euro/yen) are highly controversial these days. Bloomberg reports that some foreign exchange analysts see 96 and others see 85 (whereupon we should expect intervention). We are following the chart, which shows Day 1 of an upside breakout. We switched the signal but are never really happy with a new signal until it surpasses the most recent extreme level, in this case the high of 94.64 from January 6. Considering that the Japanese economy is in the worst shape of all G7, the yen "should" be weak… but considering that there is probably a trillion of two still out in the world to be repatriated to Japan and plenty of risk aversion triggers to come, the yen could resume its uptrend on capital flows or perception that capital flows "should" be occurring.

Pounds to US Dollars = 1.4287
Pounds to Euros = 1.1330
Euro to Pounds = 0.8817
Pounds to Australian Dollars = 2.2390

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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