In association with

Market Update 17th February 2011

Cable is poised
The Technical Trader’s view:
UK Pound Sterling - US Dollar
2.15

2.10
WEEKLY CHART
2.005 High from 1991 2.05

2.00 Triangles can be bottoms as

1.95 well as Tops.
1.90

1.85
This is all the more likely in
Low resistance 1.7050
from the low in Dec 2005 1.80
this case since the market is
1.75
bouncing from an already
1.70
established low from 2001.
1.65

1.60
Bulls need to watch the
1.55
price action at the Upper
1.50

1.3688 Low Pivot diagonal carefully.

1.45
from 2001
1.40

1.35

1.30

S O N D 2008 M A M J J A S O N D 2009 M A M J J A S O N D 2010 M A M J J A S O N D 2011 M A M

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believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.
 In association with
UK Pound Sterling - US Dollar 1.655
1.650
Upper 61.8%
1.645
1.640 DAILY CHART
100.0% 1.635
diagonal of 1.6298 High 1.630
1.625
1.620
the Weekly 1.6059 High 1.615
1.610 The rally so far from the lows
1.605
Triangle 1.600
1.595 has been characterized by the
1.590
1.585
1.580
1.575
importance of Fibonacci levels
1.570
1.5753 Low 1.565
1.560
and Prior Highs.
1.555
1.550
1.545
1.540
38.2%
1.535
1.530
The hesitation at the 1.6298
1.525
1.5217 1.520
1.515
Prior High Pivot as well as at
1.510
1.505
1.500
the gently falling Triangle
1.495

1.4720
1.490
1.485
diagonal.
1.480
1.475
1.470
1.465
1.460
1.455
But note too the support from
1.450
1.445
1.440
the relatively minor Prior High
1.435
1.430 at 1.6059 – preventing the
1.425
1.420
1.415
1.410
market from falling back further.
May June July August September October Novem ber Decem ber 2011 February March

The cluster of Fibonacci

extensions above 1.6298 may
be a problem, but on balance
we are cautious Sterling bulls -
waiting for confirmation of a
break through 1.64.

The Macro Trader’s view:

The Bank of England quarterly inflation report released yesterday had been anticipated by
market players as the starting signal for the Bank to begin hiking interest rates sometime in the
next few months.

The inflation outlook short term showed a higher peak than the November forecast before
dropping back, based on the Short Sterling futures strip’s forecast of rising interest rates. But
Bank Governor King seemed to do his best at the press conference to dampen expectations of
higher interest rates in the immediate future.

His defence of the Bank’s record and policy stance rests on the impact external shocks have
had on inflation. In a nut shell he argued that domestic price and wage pressures are subdued,
but it was rising world energy, commodity and food costs that were responsible for pushing up

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This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
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 In association with
inflation and were exaggerated by the Pound’s 20% devaluation during the financial
crisis/recession.

He further argued that to react now to current inflation by hiking interest rates would be wrong,
since once these “one off” shocks had worked through the statistics, inflation would fall to
target, so a series of hikes now would likely cause an inflation undershoot relative to the 2.0%
target.

But just how many on the MPC share his view?

Only today MPC member Andrew Sentence argued that the window for gradual policy
adjustment might be closing, meaning a more aggressive series of rate hikes might be needed
eventually. So despite King’s laboured attempt at yesterday’s press conference to quell
expectations of tighter policy, it is clear there are many conflicting views among policy makers.
In fairness, King did admit this.

Although Short Sterling interest rate futures traders reacted by reducing their bets on the
likelihood of a near term rate hike, foreign exchange traders seem to take a different view. After
a brief period of weakness yesterday, the Pound has recovered against the Dollar and to a
lesser degree the Euro, which suggests Cable traders still expect interest rates to rise sooner
rather than later.

Are they right?

King based his argument on the recent external price increases representing one-off shocks.
But looking at commodity markets, those price rises could extend further. The demand created
for raw materials, energy and food by the economies of China and India, together with other
larger emerging economies, could conceivably drive those prices higher yet.

Indeed, if the US economy is truly recovering towards something like its own growth potential,
demand for key raw materials and energy will increase, further driving up costs. Will the Bank
simply stand idly by and say there is nothing we can do as inflation pushes ever higher?

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Authorised and Regulated by the FSA 124 REGENTS PARK ROADLONDON NW18XL TEL +44 (0) 7849 933573
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This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.
 In association with
King argued yesterday that to have kept inflation at target, the recession would have been
deeper. So what policy makers have done is spread the pain of reduced living standards
across the economy, through rising inflation, rather than concentrate it in a smaller group by
pushing up unemployment through higher interest rates.

But they may need to do that anyway if external inflation continues to rise. Paradoxically,
foreign exchange traders are betting on that outcome as they push the Pound higher against
the Dollar. Ironically, if the Pound goes far enough, it might just help choke off imported inflation
and the need for rate rises! But that is a long way off.

In the meantime, can the Pound rally further on expectations of rates rising sooner rather than
later? We think it can, but the move is likely to be volatile.

Mark Sturdy
John Lewis
Seven Days Ahead

SEVEN DAYS AHEAD Professional trading guides and recommendations for the World's markets

Authorised and Regulated by the FSA 124 REGENTS PARK ROADLONDON NW18XL TEL +44 (0) 7849 933573
E-MAIL MSTURDY@SEVENDAYSAHEAD.COM WWW.SEVENDAYSAHEAD.COM
This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.