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Autumn statement unlikely to alter sterling outlook

Autumn statement unlikely to alter sterling outlook

It is unlikely that today’s Autumn Statement will change the outlook materially for the pound in the near term.

The UK’s problems are pretty well documented and while gilt yields are lower partly as a result of QE, the problems in Europe have also helped keep yields low as capital from Europe has been rotated into the gilt market as money looks for a relative safe haven.

Europe’s problems have also diverted the markets attention away from the problems the UK faces, though some of these problems have been exacerbated by these problems and the political dysfunction in Europe’s governance.

The OECD yesterday predicted that the UK was already in recession in the current quarter and would stay in recession through Q1 before recovering through the remainder of the year with growth of around 0.6% in 2012.

In any case the Chancellors budget forecasts for this parliament are now seriously in doubt due to the scaling down of the growth forecasts through to 2015.

The Office for Budget Responsibility looks likely to follow suit with respect to a downgrade of growth in the UK later this today.

For this reason the budget is likely to be fiscally neutral as the Chancellor tries to maintain the confidence of the ratings agencies and keep borrowing costs at their current low levels.

The reality is, given our exposure to European markets, any measures taken will be limited in their effectiveness and the best the Chancellor can hope for is for European politicians to somehow get their act together and pull Europe back from the brink, which at the moment seems unlikely.

The pound while feeling the chill from Europe’s problems does have one advantage in that we have the flexibility to control some of our own destiny, by managing our monetary policy.

If the economy does continue to drag the likelihood of further QE seems likely, which could undermine the pound, but this policy does remain susceptible to the law of diminishing returns given the high levels of private and public sector debt, and the squeeze on incomes from inflation and below inflation level wage growth.

The pound has held up fairly well given the problems facing the UK, trading against a basket of currencies in range between 77 and 81, however given the problems in Europe it could actually start to benefit.

Against the euro it has also been trading in a range and could be argued has underperformed somewhat, but that could well change if, as expected, the European Central Bank cuts rates at its next meeting.

While a 0.25% cut is likely, we shouldn’t rule out a 0.50% cut in rates given Europe’s current problems.

The single currency remains range bound between the broader resistance at last week’s high and resistance at the 0.8650/70 area and 55 week MA.

The longer term objective remains a test of trend line support at 0.8380 from the October 2008 lows at 0.7695. For this to happen we need to see a close below the 200 week MA, at 0.8530, something that hasn’t happened since 2007.

Against the Swiss franc the pound has also been showing some strength and recently posted a significant bullish signal called a “golden cross” where the 55 day MA crosses above the 200 day MA.
If the pound can break above trend line resistance from the 2010 highs it could well make further gains.

For this to unfold the pound needs to hold above both the 55 day and 200 day MA around the 1.4400 area.

Against the US dollar it could well underperform and looks set to retest the 1.5620 area, but could struggle much beyond 1.5700.

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