Foreign Currency Exchange

The dollar continued to strengthen last week despite negative data, again highlighting the outlook for other major economies, including Europe, Britain and Japan are significantly worsening and much of the negative US data is already expected. Cable is still caught in a broad trading range over the medium term from 1.95 to 2.01 (interbank level), as rates look to remain on hold in both countries. In the longer term, sterling looks more vulnerable, with further significant negative data likely to come and with the BoE still behind in its interest rate cutting cycle.

As of Friday’s close, Fed fund futures were only pricing in a mild 6.9 percent chance of a 25bp rate increase this coming Tuesday, as the markets are widely expecting the FOMC to leave rates steady at 2.00 percent. While CPI remains uncomfortably high, the US economy is still facing a major slowdown, as evidenced by the collapse of the housing sector and marked deterioration in the labour markets. However, this doesn’t mean that the US dollar can’t gain further. Ultimately, the fate of the dollar this week will depend far more on what the FOMC says, rather than what it does.

As the world markets continue to suffer, the sickly dollar no longer controls the GBP/USD cross. Sterling is set to continue weakening as our housing market deteriorates and confidence hits an 18 year low, therefore catching the opportunities to buy at the peaks of Cables trading range is vital. Those buying should be targeting the mid to late 1.90s as a high, but be cautious as Sterling could steer the ship toward the 1.80s.