Current Environment
This past week sterling waged and lost a demoralized battle against the major currencies. The weaker than expected PPI Input (-3.3% m-o-m) pointed to a level of economic weakness greater than that seen on continental Europe. The euro rallied from that point forward into record territory, climbing to 0.90 and fueling talk of EUR/GBP reaching parity (1:1) in the near term. Multiple major releases this week include UK CPI, unemployment rate, MPC minutes, and retail sales. The combined impact from these releases will likely be bearish, but there is reason to believe sterling may be setting the stage for a comeback.
The range-bound trading pattern of the past month coupled with the breaking of an important resistance level opens the door for a test of 1.53. The reality in the UK and the world remain decidedly stark, but it is good to remember that currency movements sometimes look way ahead of the current scenario.
Scenario Analysis
Last week we indicated that GBPUSD would most likely trade in a 1.4000-1.5100 range (1.4670 -1.5110 actual). Our forecasts for the high this last week was spot on, while cable appears poised to break out of range. For the coming week, we see a GBPUSD trading range of 1.47-1.5700.
As we anticipated, cable did test GBPUSD 1.50. More importantly, it closed the week at 1.4950, a level above an important SEP resistance line and within a short distance of the more important NOV 07 resistance line around 1.53. We believe that the odds are good for sterling momentum being stronger than the downward pull from negative economic data. Our analysis also points to an inevitable pull back in EURGBP after an 8.4% rise in two weeks, towards 0.86 support.
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