Pounds to US Dollars falls as BoE Governor King has to write another letter to the Chancellor

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The US dollar rate lost yesterday by a small amount, starting around 1.3545 at the New York open at 8 am ET but the euro exchange rate creeping up to 1.3645 by 6 pm. Market News reports that there were some big US dollar sellers during the day yesterday but also some long euro position dumping. In the end, the euro rate failed to recapture the ground lost in the Asian and European sessions the night before, which presumably discouraged foreign exchange traders from buying euros. As the US day gets started today, the euro exchange rate is again testing lows.

At 7:30, the euro rate is at 1.3538, compared to the lowest low yesterday around the same time at 1.3484. This is not much room and a break of yesterday's low could set off a bigger correction. Everyone is looking, on the hourly chart, at the 50% retracement at 1.3363 of the euro move up from last Wednesday to the highest high Sunday night. An equally important level is the 62% retracement at 1.3273, which cuts the Wednesday breakout bar in half. The 62% retracement is also just under the channel bottom. Together the Fib retracement and channel bottom constitute formidable euro exchange rate support, assuming we do continue to get a pullback today.

The logic of a pullback is pretty good this time, even though we don’t need logic to expect profit-taking and second thoughts after a big move like this one. As we wrote yesterday, solving the toxic asset problem is a good thing, even if it’s only a partial solution and has some warts and pimples. The prospect of economic recovery is much stronger now, which accounts for equities and oil going up. Confidence in the US Treasury may not be fully restored, but TreasSec Geithner's reputation is a little better today than it was yesterday at the same hour. Normally we would think that a reduction in fear means a reduction in risk aversion and thus a reduction in safe-haven flows to the dollar, so "good news" in the US is, perversely, US dollar negative. And yet, growth counts. Will foreigners buy US dollars assets on the growth story, from equities to high-yielding toxic assets?

Well, why not?

The votes are still being counted.

And don't forget that a better proxy for risk aversion is euros to japanese yen, which reached a new high of 134.51 overnight and like euro/dollar, stalled. Euro/yen has since pulled back to 132.59. The 50% retracement of the euro/yen move up from the last low on March 12 to the overnight high is 128.32. We might say that if the euro exchange rate drops to that level, we have a new financial market “stability.” A runaway euro is an inappropriate overreaction to the US taking needed and desired remedial actions.

In London this morning, a reminder that fundamentals still count. According to Market News, "Pound Sterling received an unexpected boost on Tuesday as UK CPI inflation data came in stronger than expected, forcing BoE Governor King into writing another letter to the Chancellor to explain why CPI is more than 1% above target. Pounds to US Dollars had already put on 180-points in Asia, moving from $1.4710 to a six-week high at $1.4778 on the data release, while euro-sterling dropped from stg0.9250 to stg0.9205. Cable gains proved unsustainable as this pair gave over 100-points ahead of the US open to $1.4660, while euros to pounds bounced back to stg0.9225.”

Pounds to US Dollars = 1.4570
Pounds to Euros = 1.0796
Euro to Pounds = 0.9258
Pounds to Australian Dollars = 2.0933

Bye For Now
Barbara Rockefeller
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