4, August 2010
It makes a very refreshing change to see the pound leading the charge in the currency markets, outperforming all of the major currencies. Against the USD the pound hit and tested a Fibonacci retracement level at 1.5968- it did not break it but this will be the target again for today and beyond this the 1.60 level.
So what is behind the sustained turn in fortunes for the pound? A recent improvement in economic indicators has been a key driver and this has followed more recently with strong results in corporate earnings and banking results. In addition the global market sentiment has improved and the return to risk in the markets is always a boost for sterling.
HSBC, Lloyds and even Northern Rock have demonstrated a boost in profits and this is leading to sentiment that the recovery is gathering momentum with gains also posted in the FTSE. The pounds good run will also be supported by UK Halifax house prices rising 0.6% for July, however services PMI came in weaker than expected at 53.1 against a forecast of 54.5. GBP/USD slumped a touch on the news but is now starting to recoup those losses.
Overnight the Australian reserve Bank kept interest rates unchanged at 4.50%, the pace of growth is continuing in Australia in line with expectations allowing the reserve bank to slow the pace of rate rises following a succession of hikes.
Later today we have more feedback from the US economy with US personal income and spending, US factory orders and US pending sales. Economic data from the US will now be closely scrutinized for any further indications that the pace of growth is slowing. This has led to a sharp turn of fortune for the USD which has lost ground across the currency markets.
The Fed recently indicated that if growth stutters going forward then further stimulus measures could again be introduced. This would be negative for the USD especially if other major economies continue to grow ahead of the US economy.
Report by Phil McHugh
The contents of this report are for information purposes only.
Currency Market Updates
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The first main reason for the market to consolidate, accumulate or go sideways is when the world is waiting for a fundamental announcement and trades stop trading in anticipation of a major market move or breakout after the announcement. When the traders stop trading, the market starts to consolidate in a tight range or what you call a small trading range. These smaller trading ranges maybe between 20 to 60 pips! They can be seen on smaller timeframes such as the 30 minutes or 60 minutes charts.
The second main reason why a market may want to consolidate could be due to a country trying to intervene in the currency market and wanting its currency to trade within a tight range for economic reasons. Imports exports can be an important factor for a country’s economy. Sometimes countries want to spur imports or exports, for this reason that country may decide to intervene in the foreign exchange market.
For example, Japan is a major exporting country in the world. Its economy is export based. Japan may want its currency Yen (JPY) to stabilize between 110 and 115 yen to the US Dollar (USD). This is a 500 pips range. Japanese Central Bank (JCB) may feel that by intervening in the currency market, it can boost its exports making them more competitive.
In such cases of a central bank intervention, the market may go in a sideways movement for an extended period of time that may last from weeks to months. Large trading ranges such as these between 150 to 500 pips can extend for a longer period of time such as weeks or even a few months. These trading ranges can be observed on larger timeframes such as the four to eight hourly charts or daily charts.
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