Ralph Shell @ 1:58 PM, Tuesday June 15 2010
This morning the pound shrugged off the negative German economic sentiment which was sharply28.7, down from 48.7, the expected rating. The European economic forecast dropped to 19.8, down from the anticipated 41.2 rating. German new car registrations were also down 35% in the latest reporting period.
So why then the strength in the euro this morning? The market did retreat to 1.2242 prior to reversing and charging through the 1.23 resistance area. Claims that Spain successfully marketed some new sovereign debt paper perhaps alleviating feared cash shortages did help buoy the market, but we suspect short covering was another reason. The open interest, futures only, at the CME was down over 10,000 contracts yesterday.
Across the channel, the pound has been advancing like the euro. CPI numbers did come out today showing the y/y advance at 3.4% was a tick less than expected but still exceeding the 2.0% target CPI rate.
Another report helped the pound today. The Telegraph.co.uk reported:
"Budget 2010: Pound leaps as OBR says finances better than expected
The pound leapt by more than two cents against the dollar after the Treasury's new Office for Budget Responsibility cut Britain's economic forecast but said that the public finances are in better shape than previously calculated.
Markets were cheered by the verdict from the OBR – the new independent monitor of official government forecasts and fiscal plans – that the Government's debt position is less parlous than was forecast in the Budget in March. The pound rose by 2¼ cents against the dollar to $1.4788 and strengthened against the euro, with shares in London also stronger.
The moves were described by traders as reflecting the fact that although the OBR downgraded the official Treasury growth forecasts and increased its assessment of the size of the underlying budget deficit, it did not uncover any Greek-style gaps in the public finances."
The Chancellor of the Exchequer had adroitly managed the English debt so they have a much longer maturity than most other indebted nations. This, combined with the OBR news firmed the pound, bot like the euro, the speculators are massive shorts in the pound. Unless we see evidence there has been some sizable short covering, this rally may have more to go. The rally has been brisk, so a pull back, always possible, might now be a little more likely. Let's try the long side of this pair should it retreat to the 1.47 level, with an objective above the 1.50 handle.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.