Weekly Technical Analysis by Lloyds TSB

The past month has seen some exceptional moves in the FX markets and although we are only in the first few days of 2009, the volatility continues unabated.

The past month has seen some exceptional moves in the FX markets and although we are only in the first few days of 2009, the volatility continues unabated. Two major underlying themes that continue to build are the prospect for a base in equities (whether this is long term
is open to debate) and the gradual reversal of commodities. Whilst a month ago, commodity buying was limited to gold and selective softs (and a bullish view met with derision), it has since broadened to base metals with the primary moves being built on. At the moment the
market is taking this as a dollar positive signal, but the prospects for this to lead to a rapid dollar correction are growing.

It is a consistent feature that inter-market relationships can wax and wane, but if equities continue to squeeze, euro yen should follow the dollar yen rebound, putting the risk towards a broadly weaker dollar. This could be a large catch-up play. Naturally, sterling has benefitted from the current stability in equities and, to some extent, commodities. The sharp reversal in euro sterling reflects the extent of the dislocation between what’s going on in the asset markets and sentiment. If equities continue to rally, and the technical indications are that they will, euro sterling should continue to ease to sub 0.9000 and
potentially all the way back to 0.8100 over the coming months. Cable should also benefit and whilst one can not be completely confident of a reversal when key support is so dangerously close at 1.4350, the longer term prospects favour a push through 1.6000, again contigent on the currently bullish scenarios building in commodities and equities.

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