The rise in sterling seems exaggerated

Now that the US report on employment has been published, the G20 summit is completed and the central banks have announced their monetary policies, the dollar comes under renewed pressure. The market, believing that the latest news is of no surprise, again seeks out risky assets, leading to a fall in the US dollar and an increase in the "carry trades".

The release on Friday of US employment figures, which showed unemployment is at its highest for 26 years, and the sluggish US statistics may lead to prolongation of the period during which the rate will remain "exceptionally low", which is considered negative for the greenback. A very low yield makes returns on investments in the US very unattractive.

The rise of gold, supported by purchases by several central banks and comments from the IMF which estimated that the downward trend of the US currency was not finished, pushed investors to sell the US currency.

The meeting of finance ministers of the G20 in Scotland last weekend had little impact on financial markets. The final statement of the summit did not mention the exchange rate. However, statements by US Treasury Secretary Timothy Geithner and Prime Minister Gordon Brown provided further guidance to the market.

The two warned against a premature withdrawal of the stimulus, which suggests that tightening of monetary policy and an exit from "Quantitive Easing" will not occur in the near future. These statements differ from the position of the ECB which, in the speech of its President Jean-Claude Trichet, suggested it might withdraw monetary stimulus next year. The pound is also soaring, close to 1.6800 against the dollar and 0.8900 against the euro, but this seems a bit exaggerated. The recent growth of the British currency is mainly due to the optimism generated by the decision of the Bank of England last week to raise its "Quantitative Easing" programme by £25 billion, rather than by £50 billion as many "feared".

The main reasons cited by the Bank of England to increase its "Quantitive Easing" programme is to stimulate the recovery of the economy and to curb rising inflation. According to a study published this week by the National Institute of Economic and Social Research, GDP in the UK shrank again in the period of three months ending at the end of October, which dashed hopes of an imminent economic recovery. The increase in producer prices in October, the first since February 2009, should be short-lived, because the inflation is mainly due to the rising energy prices. We expect the Bank of England to extend again its "Quantitative Easing" programme by the end of the year. In addition, the focus remains on Fitch's comments that the UK AAA rating is most at risk of a downgrade. The current high level of sterling against the dollar and the euro should again attract some investors.

Upcoming FX Key events

Key economic data include UK employment, Australian employment, German and eurozone Q3 GDP and US trade balance. The Bank of England releases its inflation report, which will be eagerly awaited by the market.

FX Technical key points

EUR/USD is bearish, target 1.4320, key reversal point 1.5150
USD/JPY is bearish, target 85, key reversal point 92.50
GBP/USD is bearish, target 1.5050, key reversal point 1.6850
USD/CHF is bullish, target 1.0650, key reversal point 1.0000
AUD/USD is neutral, watch 0.8850 and 0.950
NZD/USD is neutral, watch 0.7300 and 0.7725

Mr Longchamp is head of trading at RTFX Ltd.

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