London 10/12/07- The Pound remains strong against the US Dollar despite some falls last week. It peaked just short of $2.07 on Monday and again on Tuesday before dropping sharply. It touched a low of $2.02 on Thursday and has spent its time since then climbing laborious back above $2.03.

The Monetary Policy Committee’s interest rate decision overshadowed Sterling’s whole week. Initially it just looked as though investors were clearing the decks in preparation for the Thursday announcement. As the week progressed it became obvious that there was a wholesale offloading of anything resembling a long Sterling position. The bale-out climaxed on Wednesday when the Halifax released its November House Price Index. It marked the third consecutive monthly price fall and completed a series of similarly negative from other researchers. Investors looked at the Halifax figure, extrapolated it into 12.5 per cent annual drop and came to the conclusion that the MPC would have no option but to cut the Bank Rate.
On Thursday that fear was realised. Fortunately for the Pound, so much pre-emptive selling had gone on that the bears had run out of ammunition. A burst of volatility threatened to push Sterling down through long term support against the Euro but calm quickly returned.

For the US Dollar the focus was on Friday’s employment report. On the first Friday of every month the change in Non-farm Payrolls is hugely important to investors’ outlook for the US economy. A strong rise in payrolls means that businesses are optimistic about future demand. A weak figure points to reduced optimism and a fall in payrolls is very bad indeed. Last week the consensus among economists was for a rise of around 80,000. Private employment agency ADP surprised everyone (as it often does) on Friday with an estimate that payrolls would rise by double the forecast number. Although not entirely plausible, the ADP paper heightened expectations to such an extent that when the official report showed a decent 94,000 increase the market was vaguely disappointed.

With only a couple of weeks to go before the Christmas break things ought to calm down as investors tidy up for the year-end. On one hand this ought to reduce investors’ appetite for pushing currencies around. On the other, the reduced liquidity could magnify such moves as do take place. An optimist would say that Sterling has taken a full dose of punishment and should be allowed to recover. But that’s optimists for you: Buyers of the Dollar should still protect themselves with a stop order.

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Source:Moneycorp