Sterling Proves Oversold as BOE Trims by 50bp

As speculated in our most recent report, Sterling fared well across the board in currency markets yesterday.  A drop of 50bp in the Bank of England base rate to an all-time historic low of 1.5 per cent, being precipitated by a high degree of uncertainty in markets, actually spurred some small Sterling strength, especially against the Dollar which reached a high of 1.5375 at one point.  GBP/EUR, which had also seen some heavy interest rate bets to the tune of 75 or 100bp in the run up to the meeting, also saw some cheer with the rate spiking up towards the 1.13 level at one point before pulling off to finish the day around the 1.11 mark.

As made clear, the reasoning behind the degree of Sterling buying, rather than any bounding optimism over future yield appeal for the Pound, instead reflected a paring of positions as many traders revised forecasts which saw monetary policy being vastly more dovish on the short term than has played out.  Although base rate is pretty clearly heading for the 1 per cent mark on the medium-term, there now seems to be some relief over the fact that all the glum news about Alastair and Gordon rolling up their tattered silken sleeves and starting the printing presses is not going to come to reality quite yet.  Fundamentally though, the Pound still looks awful, yield-wise and in terms of the diversification of our real economy, but nonetheless, it has certainly been oversold, particularly against a flapping Euro.

Yesterday also saw some dreadful economic figures for the Eurozone, with Consumer Confidence and German Factory Orders (monthly) being particularly disparaging for the region.  However, despite a deteriorating picture for the area, the market has remained largely undecided on the short-term for the currency in across the board terms.  This is largely owing to a high degree of tension over next week’s meeting by the European Central Bank which ought to make up the minds of many investors on how the notoriously unpredictable Central Bank is going to play its cards over coming months.  There is also still a lot of nervousness over the US economy.  Unemployment Claims out yesterday afternoon were not as bad as expected, but at just shy of 470k for the last week, are hardly inspirational. 

Today poses more risk for the Dollar in the form of the Non-Farm employment rate, being a measure of jobs lost or gained over the last month in the non-farm sector.  This is widely expected to be extremely negative, alongside a potentially awful Unemployment Rate, although the degree of movement out of the favour of the US currency yesterday may limit losses this afternoon.  Expect GBP/USD to hold above 1.50 but not see much movement over the 1.52 level.  GBP/EUR should also see some small movement with a topside of 1.12.