One might have expected that good retail sales numbers, better GDP estimates and improving Purchasing Managers’ Indexes in European states and in the Eurozone as a whole would have checked the fall of the Euro against the US dollar, and that similar improvements, and positive rhetoric from the Bank of England and others, would have nurtured the green shoot of a reversal of the downtrend in Cable (the GBP / US dollar pair) that we have been watching here for a little while now (also see below).
Blowout US Non-Farm Payrolls figures last Friday put an end to all that. Even in spite of weather Stateside that has been so dire that government offices in Washington decided to open later on Friday, and there was a suggestion on the newswires that the very payroll numbers themselves would be delayed as a result, the increase in jobs that was reported was way above the very best estimates that had been made beforehand.
This has placed the US Federal Reserve way out in front what is effectively a three-horse race to the normalisation of monetary policy, which is a polite way of talking about a rise in core interest rates. And when it comes to Foreign Exchange, it is the search for yield, influenced by differentials in interest rates, which most often drives the market. The race analogy might not be the best one, because one of the horses, the ECB, is not even in the running at present. In Britain, the upcoming general election has now appeared fully on the radar, and this will maintain uncertainty. Even when it is over, it can be predicted that a possible referendum on continued British membership of the EU will take over as a potential destabilising feature for Forex rates.
Sterling resurgence: forget about it (for now at least)
The breakout from the down channel that we have been watching in GBPUSD has not become a reversal to an up-channel. The Non-Farm Payrolls in the US on Friday placed the final nail in the coffin of that particular idea. The next possible scenario is that Cable will settle into a range that is bounded to the downside by the nice round number of 1.50 (The market just loves nice round numbers).
There is nothing fundamentally wrong with the British economy, and this fact could be expected to militate against a break below the psychologically important 1.50 level. On the other hand, as already noted above, upcoming political events, in the absence of meaningful action (as opposed to words) on the part of the Bank of England, could leave the pair moribund, at best.