Sterling Euro – stick with the trend

The Technical Trader’s view:

• MONTHLY CHART The big picture of Sterling Euro is powerfully bearish for Sterling. The Reversal pattern formed since 1996 suggests moves up as far as 0.89 minimum. We’re close but not there yet....
• WEEKLY CHART The market formed an unusual expanding consolidation for most of 2008. And then the market broke on up. The pull back should expect powerful support at the rising diagonal beneath the market at 0.9250 or thereabouts. Look closer still…
• DAILY CHART The pull-back should find support both at the diagonal and the band of horizontal support from the near highs at 0.8062-0.8185.
• DAILY CHART That pull back itself has the shape of a Triangle. Traders should focus attention on the higher of the two diagonals – currently at 0.8522. A break of that will triggers fresh sales of Sterling….

The Macro Trader’s view: The recent price action in Sterling/Euro has been mainly sideways. This followed a period when the Pound weakened significantly against the other major currencies, including the Euro. Indeed so rapid was Sterling’s decline, it didn’t seem unreasonable to expect Sterling/Euro to go to par. The engine for Sterling’s collapse was the weakness of the UK economy which looked set to experience the deepest recession of the major developed economies. While the US continued to experience economic difficulties, the prospect of, and eventual election in November of a new President brought a degree of optimism both in the US and abroad, as Barack Obama was hailed as JFK and FDR all rolled up into one. In the Euro zone, while a recession was expected, the outlook wasn’t judged as severe as in the UK, and this helped undermine the Pound. But over recent weeks the ground has shifted: - The UK government has delivered an emergency mini budget that has offered Sterling limited support, despite it being previously viewed as negative for the currency during early discussions,- In the US the economy continues to deteriorate and the Dollar rally looks in doubt, and - In the Euro zone the economy is in recession and the outlook has darkened. While the German and French governments have ruled out copying Brown’s fiscal boost, the EU has announced a package worth Eruo200B (but will the member states support it?) Returning to Sterling, traders are still assessing the worth of the UK’S fiscal measures, which have greatly increased National debt and will take several years to reduce and return the UK’s Government finance to a more stable and sustainable path. What Brown has done is to take a huge gamble: - If it works, the UK recession will be less severe than otherwise would have been the case, and the buildup of debt, while still questionable, will be just manageable, but - If it fails, due to the overall weakness of the global economy and the plan’s reliance on a VAT cut, (which may not take fully into account rising unemployment and an unwillingness to spend during times of economic uncertainty) then the debt burden will be even bigger, take longer to pay off and condemn the economy and Sterling to a prolonged period of underperformance. Once traders have made up their minds, we expect the Pound to come under renewed selling pressure as we judge the stimulus will prove an expensive mistake, leaving Sterling/Euro at par a possibility. Mark Sturdy, John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]