Sterling stuck in $1.75 to $1.85 range

Technical resistance and Downing Street unrest took their toll on sterling despite decent economic data. UK and Canadian interest rates remained unchanged after policy meetings.The week began promisingly for sterling with a rally that took it from $1.77 to above $1.8150 by Thursday. It did not last. The pound had slumped to $1.7650 by Friday. A late rally allowed it open in London this morning at $1.78.

The economic data continued to favour sterling at the beginning of the week. Once again Britain led the way in the Purchasing Managers’ Index stakes with the UK manufacturing PMI rising nearly two points to 45.4. The Euro zone and US measures also improved, to 40.7 and 42.8, but were still adrift. The German figure was well behind at 39.6.

It was even better news on Wednesday with the services sector PMIs. Investors had been looking for a one-point improvement to 49.5. What they got was a three-point increase to 51.7, putting the services PMI in the expansion zone for the first time since April last year. The equivalent Euro zone figure was seven points behind while the US managed just 44. And what was the reaction of investors to this outstanding news? Why, of course they sold the pound. Sterling/euro’s six month high coincided precisely with the announcement, suggesting that speculators had used the good figure to offload their long positions.

There was more grief for sterling on Thursday. A rumour that the prime minister was resigning was closely followed by a denial from Downing Street. It is unclear which story did the most damage but the combined exercise cost the pound three cents in as many minutes.

The central banks in Ottawa and London both decided to leave interest rates unchanged at their meetings on Thursday. For sterling it meant a Bank Rate of 1% and for the dollar the policy rate stayed at 0.25%. Neither announcement was a surprise. Canadian unemployment jumped in May from 8% to 8.4% with a larger than expected loss of 42,000 jobs. The equivalent US figure was -345,000 but because the American outcome was far better than forecast the US Dollar – unusually – reacted positively to the news. It allowed the pound to win back some of the losses that had afflicted it the previous day

Sterling/Canada has drifted out of its narrowing channel without picking a new direction. It is starting to look as though a range of $1.75-$1.85 could be with us for a while. Buyers of the Canadian dollar should use a stop order to protect against a surprise collapse but can still hope for a break on the upside.

Post courtesy of TTT Moneycorp

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