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FX round-up: Rout in Sterling breaks down at 200-day moving average

By Alexander Bueso

Date: Thursday 03 May 2018

FX round-up: Rout in Sterling breaks down at 200-day moving average

(Sharecast News) - Sterling's rout against the US dollar was broken by technical support at its 200-day moving average, even as analysts pushed back their forecasts for the next hike in Bank Rate to August - at the earliest.
By 1811 BST, cable was edging 0.02% higher to 1.35754, after falling as low as 1.3537 during the session, with the 200-day moving average to be found at 1.3520.

The renewed downdraft in the pound came as IHS Markit reported that its services sector Purchasing Managers' Index had only picked-up to a reading of 52.8 in April after a print of 51.7 for March.

Thursday's reading fell short of the consensus forecast for a rebound from the 20-month lows plumbed in March to 53.7.

It also prompted economists at Barclays Research to pull their forecast for an interest rate hike at the 10 May meeting of the Monetary Policy Committee.

Indeed, in a research note sent to clients, Fabrice Montagne and Sreekala Kochugovindan said they now expected Bank Rate to stay where it was throughout the Bank of England's forecast horizon.

"Structural weakening in the service sector adds to cyclical cooling in manufacturing and points to growth being materially lower than expected by the Bank. Accordingly, we call off our forecast of an interest hike at the May MPC next week and now expect Bank rate to remain unchanged over the forecast horizon," they said.

Morgan Stanley on the other hand reportedly pushed back its call for the next hike in Bank Rate from May to August.

Analysts at TD Securities were now also expecting an August hike.

"Sterling's fundamentals have deteriorated but quite a bit of bad news is now in the price. While we expect cable to remain under pressure ahead of the MPC, our base case suggests a significant chance of a short squeeze," they said.

"A further dovish shift from here would keep sterling in the market's cross-hairs, but we think rotating into GBPJPY shorts may have greater potential for GBP bears."

In the background, the market spotlight appeared to have shifted towards the first round of trade talks between Beijing and Washington, ahead of the arrival of the US Commerce and Treasury Secretaries and the Trade Representative's arrival in China.

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