Where Next for the Sterling Forex Markets?

The Pound is suffering again in the currency markets and it has fallen to its lowest levels against the Euro currency since July 2010. It briefly pushed through the £0.8400 level after Bank of England data showed that lending to UK businesses fell for the fifth successive month in July.

UK House price data also pointed to sluggish demand for property as prices have slipped back for the third successive month.

The Sterling Rate Index, a barometer of currency strength, has also drifted back towards the lower end of its recent range below 81.00. Nevertheless the index is still some way off the key support level at 79.90 that has supported the Sterling strength that we have seen since May 2010.

However the market isn’t completely Sterling negative. Credit ratings agency Moody’s have helped stem some of the Sterling losses after it stated that the UK’s AAA rating would be able to withstand the economic challenges that it is currently facing.

This announcement may not seem worthy of mention now, however in early 2010, keeping the AAA rating appeared extremely unlikely when all three major ratings agencies were queuing up to state that the UK’s rating was under serious threat if clear steps to tackle the deficit were not put in place.

Looking at the price support and resistance levels, according to CMC Markets: “Whilst the £0.8400 cap is in place then further downside remains the likely bias. Since May the £0.8400 level has represented the June, August and September highs and Sterling only closed above that level for 1 week in July when it hit £0.8535. A break above the £0.8400 level is needed to re-target these highs.

“The £0.8300 level should continue to act as price support, but should this level give way to further weakness then the next test will be back towards £0.8250″.

The more recent UK inflation data could help the Pound. Inflation figures have been an unwelcome reminder that the Monetary Policy Committee continues to underestimate the price pressures prevailing in the economy.

Andrew Sentance’s current contrarian view that higher rates are needed may become more widely held if inflation continues to rise or hold up in the coming months. If you look at the spread betting markets, it is hard to think otherwise when one looks at the current surge in soft commodity prices. Naturally higher rates should help Sterling.

Note also that there has been talk that if the US Federal Reserve were to indulge in further asset purchases then the Bank of England would be forced to follow suit. That however could be very dangerous given the current high level of inflation in the UK.

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The author is a seasoned financial author offering strategic and tactical trading views for some of the leading spread betting companies.

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