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Sterling falters as short-term outlook dims

H.S. Borji
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Sterling falters as short-term outlook dims

The British pound continued to slide Thursday, outweighed by a resurgent greenback that has advanced swiftly over the past three weeks. The sterling, whose meteoric drop the past three weeks has made headlines, is caught in a downtrend as the short-term outlook dims.

Cable on Thursday declined for the thirteen time in sixteen days, as the markets applauded another fall in US weekly jobless claims, while shrugging off another status quo rate statement from the Bank of England.

The GBPUSD declined 0.12 percent to 1.6833, rebounding from an intraday low of 1.6823. Initial support is located at 1.6821 and resistance at 1.6868, the 100-day simple moving average.

Cable’s value has declined 1.7 percent since July 16. The pair is up 1.5 percent since the start of the year.

The Bank of England today announced it would leave its benchmark interest rate at 0.5 percent, as expected by the consensus. Economists expect the August meetings resulted in the first split decision over interest rates in more than three years, a sign the Monetary Policy Committee was beginning to shift its outlook on monetary policy.

The nine-member MPC’s vote count will be made public in nearly two weeks when the BOE releases the minutes from today’s meetings.

At least one member of the MPC is expected to vote against keeping rates at 0.5 percent. However, the central bank isn’t expected to begin raising the borrowing rate until next year.

Expectations for higher interest rates reached a high point earlier this summer after central bankers suggested they were pleased with the recovery, which has seen the unemployment rate tumble to 6.5 percent in the three months through May.

Expectations for an early rate hike dissipated last month after the BOE expressed concerns about weak earnings growth. Average earnings are rising at less than half the rate of inflation, suggesting considerable slack remains in the labour market.

A less hawkish BOE will probably keep the pound subdued in the short-run, allowing the dollar to broaden its uptrend.

The US dollar index is at a more than ten-month high, having gained 1.7 percent over the past month.

Despite the pound’s recent woes, investors should be reminded that the long-term outlook remains positive. The BOE is widely expected to raise interest rates early next year, as the UK growth engine continues to accelerate.

The Federal Reserve, on the other hand, is expected to hold its overnight rate at record lows until next summer.

The pound traded within range against the euro, as the EURGBP consolidated at 0.7938, declining 0.05 percent. Initial support is likely found at 0.7922 and resistance at 0.7954. The pair is pacing for a weekly decline of 0.6 percent.

The euro will probably decline further in the short-term after European Central Bank President Mario Draghi said on Thursday he was pleased with the common currency’s recent weakness. A weaker currency, it is hoped, could help shore up stubbornly low inflation in the Eurozone.

The ECB held its cash rate at 0.15 percent, as expected by the consensus.

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