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SHORT TERM CORRECTION WITH STERLING LIKELY

 
6 October 2010

Forex markets remained unchanged overnight as markets digested volatile price action from the last 48 hours. The Euro saw fresh yearly highs after touching $1.3839 versus the USD in late trade yesterday and remains firm against a number of its counterparts. The US Dollar however remains very much bearish against the majors however technical indicators may signal a possible reversal in trend as speculators look to take profit from the key psychological levels currently being tested. Broader price action overnight seems corrective more than anything else and we have seen some reasonable risk reduction over the past 24 hours in short Dollar positions.

Sterling, meanwhile, looks set to remain firm versus the dollar, underpinned by negative USD sentiment, higher investor risk appetite and yesterday’s surprise rise in the services PMI which has helped to ease some concerns regarding a double dip scenario in the UK. However, while it saw 2 month highs versus the USD, sterling continues to lag the euro as markets debate the prospect of further policy action from the Bank of England.

EURGBP is close to year’s highs while cable struggles to break 1.60. The question is how much additional QE is now priced in for the pound? Given the amount of airtime this topic has received the past few weeks and the clear underperformance of the pound and likewise UK 10yr close to historical lows, I think there is a chance the pound is oversold and we are due some sort of short term correction or at least a sustained move higher in the TWI towards 81 area and GBPUSD towards 1.6200. Much of this will depend on the data starting to stabilise.

Looking at the commodity sensitive currencies the Australian Dollar seems to have clawed back some of its losses from yesterday following a surprise from the RBA where rates were left unchanged, the Aussie gapped from the 0.9670 area down to 0.9590, and the market is now pricing in about a 35pcnt chance of an increase at the November 2nd meeting, with 55 – 60pcnt chance of an increase by December. GBP/AUD was up a clear 1% from the opening yesterday but during the Asian session stable price movement has allowed the AUD to correct itself against a number of its major counterparts. The Kiwi is holding in well post the RBA announcement as AUD/NZD has seen significant losses from the 1.3050 area (Resistance). We should now see AUD/NZD develop to the 1.2825 area and so the Kiwi should continue to hold well.

Overall price movement remains largely in favor of the Euro at present, markets are clearly bias towards USD weakness and general sentiment surrounding Sterling is very much negative with bearish price movement expected over the coming days.The market currently presents an excellent price for any Euro sellers, Dollar buyers should take advantage of the current highs and Sterling sellers should look to cover positions or work Stop orders to protect against further bearish movement. Stop orders are useful when the market is in a downward trend and allows buyers to minimise risk and exposure to what has once again become a very volatile market.

If you would like to discuss your requirement further or if you would like a live trading quotation against any of the 32 most actively traded currencies do not hesitate to give me a call on my direct line +0044 1736 335264.

Tom Trevorrow

Senior trader

Tel: +0044 1736 335264

tom.trevorrow@torfx.com

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