Sterling Slides on Fears of Double Dip
After managing to sustain its highest levels for a year for a couple of weeks now the pound has slid back today against a basket of currencies on the back of risk aversion and capital flows into the US dollar, yen and Swiss franc as fears about the US and global economy continue to weigh on sentiment and provoke capital rotation into less risky assets.
The positive sentiment surrounding the better than expected UK Gfk consumer confidence number overnight, and the slightly better mortgage approvals appears to have been put to one side on the back of global growth fears.
For now the pound is finding support on its trade weighted index around the 81.60/65 area which is the August lows, as well as trend line support from the 21st May lows and the 50 day moving average.
A break of these support levels could well open up further losses towards the 81.00 level as well as the key support around the 79.90 level.
In the CFDs markets, Sterling’s falls against the Swiss franc to 18 month lows has been the catalyst for some of these losses today, and the break of support around this 18 month support at 1.5800 has triggered stop loss selling towards the 2008 lows around 1.5125.
It may find support around the 1.5650 level which is the January 2009 lows in the interim, but with momentum firmly with it the Swiss franc is in the ascendancy.
Elsewhere in FX day trading, against the yen the pound is in slightly better shape but not much, looking to re-test its May lows around 126.80, but it needs to break below its August lows first at 128.80.
What is surprising given the talk of possible stimulus measures out of the US is the strength of the US dollar, as cable again breaks below 1.5400 and looks set to test towards 1.5320 which is the 38.2% retracement of the up move from 1.4230 to the 1.6000 highs earlier this month.
A break below 1.5320 would then open up 1.5115 which is the 50% level, while the pound needs to regain 1.5620 to stabilise the down side momentum.
Given the current sentiment surrounding the global economy the market appears to have come to the conclusion that UK economic data is probably going to be as good as it gets for the time-being, irrespective of the continued deterioration of US economic data.
As such the US dollar looks likely to continue to benefit on safe haven flows against certain currencies, until such time as US economic data improves substantially and risk aversion subsides, or the Fed decides it needs to inject further stimulus, which would then probably see the US dollar weaken again.
By Michael Hewson, Market Analyst, CMC Markets.
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