US Dollar, British Pound, Euro - Where Are We Now?

There’s no way I can type as fast as these markets are moving, so the sub-title should read “Where Were We Yesterday?” and I’ll do my utmost to keep things topical.

What I can be certain of is that over lunchtime today we’ll hear the latest decisions on interest rates in Europe and the UK. Equally certain, tomorrow lunchtime’s beer and sandwiches will be cast aside, with all eyes on that economic behemoth, the US payrolls.

Yesterday I shared my thoughts on the comparatively sane equity markets (Where Are We Now? Equities); today it’s the turn of the major currencies.

January Currency Moves In 30 Seconds
The year began with a swift reversal of the pre-Christmas move; the Euro paid dearly for December’s exuberance, crashing 700 pips against Sterling and 1100 pips against the Dollar. Sterling rallied 600 pips against the Dollar, but was unable to hold above $1.50 and ended the month lower at $1.4490. The Euro bounced off a key Fibonacci level against Sterling, but couldn’t hold £0.95 and returned to the same support level at £0.8830. Just for good measure the Yen made gains against all three currencies.

Let’s Check Out Some Charts
GBP/USD

On Wednesday Sterling smashed through the recent high of $1.45, reaching $1.4576, before profit-taking set in. The $1.45 level was previously a strong support line (give or take a few dangly bits). So, if Sterling makes it back above the figure, and holds the daily (or preferably weekly) close there, we could see a launch-party heading back to $1.50. The positive MACD and RSI over 50 add support to the challenge.

EUR/USD

Yeah, OK, I’ve got an anti-Euro bias, but to me this one has further to slide. The 21-day MAV confirms a good downtrend, supported by the MACD and RSI indicators. To be fair the price has recently bottomed out around the $1.28 level so I’d feel more comfortable selling the rallies, but would be happy running a profitable trade with a trailing stop to target $1.24.

EUR/GBP

This one got pummelled on Wednesday when the price failed to break £0.9080 for the third time. The Euro is currently finding a few friends down at £0.8830, making a 250-pip trading range. The difference from the last bounce though is that last time the price bounced off its 50-day MAV; this time the same MAV is acting as resistance. The MACD and RSI indicators hint at another test of £0.8830 then down, down, down.

What’s Driving The Markets Today?
I tend to think of the forex market as a hormonal wife; often the current thought process contradicts the previous thinking, and the reaction is quick and dramatic. But you’re better off accepting it and going with the flow. And when the mood changes don’t fight it; it’ll cost you money.

A lot of currency trades are based on interest rate differentials (these are called carry trades)

Traders tend to favour currencies with a higher, or rising, interest rate over ones with a lower, or falling, interest rate. That’s why Sterling was hammered just before Christmas when it became clear that the UK would have to cut rates to near zero. Easy innit?

Well, not always. See, the US gave up interest rates as a bad job, yet the Dollar’s doing OK against Sterling and the higher-yielding Euro. Conversely, the Euro has started to suffer because the ECB are still locked in a time warp; they seem unable to shed their inflation-phobia and cut rates properly.

If investors think that cutting rates hard and fast will lead to an early return to growth they’re quite likely to tuck a bit away and not worry about the income. This is especially true at the moment when even the high-yielding currencies are offering barely 3-4%.

Flight To Safety
A constant theme over the past few months has been a flight to safety. Bad economic or market news has sent investors scurrying for perceived low-risk currencies, like the US Dollar, Yen and Swiss Franc. The Dollar has also been boosted by the repatriation of funds from riskier markets. On the days when confidence returns to the markets the higher-yielding currencies, including Sterling and the Euro, have risen in value.

And, like any good wife, the market doesn’t forget. Just when the US thinks it’s got away with creating more money than anyone could possibly count, the markets will choose that as ‘moan of the day’ and slam the Dollar.

My Twopenneth Worth
My strongest view is a dislike of the Euro. I reckon it’s held up far too well considering the EU’s falling apart at the seams. Assuming confirmation of the ‘No Change’ decision, it’ll be interesting to see what Monsieur Trichet hints at in the press conference. I wonder if he’ll still be wary of inflationary pressures.

An increasingly large part of the Eurozone is struggling to pay its way; Greece, Portugal and Spain recently had their sovereign debt downgraded, and Ireland is being closely monitored. France has returned to type with characteristic strikes and, no doubt, the ritual burning of cows. The EU is a shambles and unless the ECB act to cut rates, more countries will look longingly at their unloved neighbours who are free to cut rates and lower their currency.

Watching today’s price action I wonder if the UK decision is a bit of a red herring. Unless they pull a rabbit out of the hat and cut by 0.75%, I think traders might try and test the $1.45 level again. And if resistance at that level fails I’d want to jump on the Cool Britannia bandwagon pronto. But with one proviso, if equities tank lower then money could return to the safe-haven Dollar.

That aside, I try not to hold fundamental views on currencies. Like I said above, there’s always a reason to trade, it’s just working out which theme the market is focussing on and which is the best currency pair to use.

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