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The Pound declines against the majors, after UK unemployment rises and increases risk aversion
GBPEUR/GBPUSD
The Pound fell against through key support at $1.6400 against the Dollar yesterday, as gilts rose and stocks plunged, following reports that U.S employment increased speculation that the global recession won't end any time soon. Bank of England policy maker Dales Miles also said that banks remain on "life support".
The UK currency also traded through 1.1630 versus the Euro, as the FTSE 100 Index dropped 2.5% in London, led by a sell-off in commodity prices, after the monthly U.S job report confirmed that more jobs were lost last month than economists' had predicted. The FTSE has still climbed 21% from the low of the year on March 3rd, amid speculation that the economic slowdown is easing, but the Pound will remain susceptible to volatile swings in risk sentiment.
Manoj Ladw, a senior trader at ETX Capital, said that "the U.S unemployment rate continues to creep towards the 10% mark. As long as jobs are lost, it's difficult to see a near-term end to this recession." Yesterday's government report showed that U.S employers cut an additional 467,000 jobs in June, while the jobless rate climbed to 9.5%, the highest level since 1983.
Economists' had predicted a 322,000 decline in non-farm payrolls, while job losses peaked at 741,000 in January, the biggest monthly amount since 1949. The increase in risk aversion encouraged investors back to the relative security of safe haven assets, as the advance in the U.S jobless rate pushed the yield on the two-year note down by the most in a week.
Britain sold £2.5 billion of 30-year gilts yesterday as it boosts borrowing to record levels to finance measures in order to drag the economy of the worst recession in a generation. The Pound dropped 0,5% to a low of $1.6386, the lowest level in nearly two weeks, but the UK currency recovered most of its losses versus the Euro, closing 0.4% higher last night.
A survey of UK construction released yesterday added to recent evidence that the economy is far from a recovery. An index based on a survey of purchasing managers at building companies fell to a level of 44.5 in June, from 45.9 in May. BoE policy maker Miles told Parliament's Treasury Committee that "whilst a return to growth does seem plausible and policy is gaining traction in the economy, the idea that we will return to rapid growth that will be sustained over several years seems pretty unlikely."
The Bank of England said that lenders expect to increase credit to households and companies in the next three months. The Pound may weaken considerably against the U.S Dollar as investors withdraw funds from the UK amid political wrangling over the country's public debt burden. The UK currency is still up 12% against the Dollar this year but is little changed in the past five trading days.
Simon Derrick, chief currency strategist at Bank of New York Mellon, said that "we suspect that the Pound weakness may only just be starting. The company's forecast for the Pound to reach $1.80 by the end of the third quarter is now under review." Sterling is still being hampered by concerns over the UK debt position and it failed to hold its best levels against the Dollar, with a retreat back through the $1.65 level.
EUR/USD
The Dollar was unable to break through key support in the $1.40 region versus the Euro yesterday and retained a generally weaker tone through the course of the day. The Euro gained some initial buying support from a slightly stronger-than-expected German retail sales data, while global risk appetite was also firmer which helped underpin the single currency.
U.S economic reports were mixed and did not have a decisive impact on the market, as the ISM index for manufacturing rose marginally above preliminary expectations, although there was some disappointment that the orders index slipped back to below the 50 level. That suggests that any recovery in the industrial sector will stall relatively quickly.
The European Central Bank elected to keep interest rates on hold at a record low of 1% yesterday and the Chairman Jean-Claude Trichet signaled that the central bank will keep rates unchanged over the coming months. Officials will deploy new tools to fight the worst recession since the Second World War, such as purchasing covered bonds.
The Euro weakened in the aftermath of the statement, as Trichet refused to rule out the option of further rate cuts, saying that "we did not decide today that this was the lowest level we would attain under any circumstances." The ECB has reduced its main rate by 325 basis point since October to bolster the economy and flooded the banking system with hundreds of billion of euros.
The Pound continues to decline against the majors, falling through key support at $1.6400
GBPEUR/GBPUSD
The Pound extended its decline against the Dollar yesterday, falling a further 0.6% on the session, to a low of $1.6383. The UK currency fell through significant support levels at $1.6400 against the Dollar and 1.1630 versus the Euro, as global risk appetite disintectrated and stocks plunged worldwide. The Pound also fell back under 1.1700 versus the Euro, after a government report showed that UK gross domestic product in the first quarter contracted by the most since 1958.
UK stocks fell as the economy shrank by more than preliminary forecasts and investors speculated that the steepest quarterly increase in the FTSE 100 Index in nearly six years has outpaced earnings expectations. The benchmark FTSE 100 lost 1% on the day and the Pound dropped as risk appetite declined.
The Pound has retreated from its highest level in more than eight months against the Dollar, touching a high of $1.6740 on Tuesday, after the Office of National Statistics said that the UK economy declined 2.4%. According to RBC Capitals, the report may have set off automatic sell orders for the Pound. Adam Cole, global head of currency strategy at RBC, said that "the sell-off at the back of the growth numbers probably triggered stops on long-pound trades. The outperformance of sterling is a sustainable trend." A long position is a bet on an asset rising in value.
The Pound fell 1.3% against the Dollar to a low of $1.6387 in New York, after rising earlier as much as 1.1%, to the highest level since October 21st. The UK currency also declined 0.4% against the Euro but although the GDP report contributed to the decline, improved data from other parts of the economy has put the Pound on course for its biggest quarterly advance against the Dollar in more than 21-years.
An index of manufacturing output rose more than initial forecasts in June, to record the smallest contraction in over a year, providing further evidence that the recession is easing. A gauge based on a survey of factory output climbed to a reading of 47, the highest level since May 2008, and just under a level that would indicate growth in the sector.
The report from the Chartered Institute of Purchasing and Supply indicated that the UK economy may b past the worst of the slump, after reports earlier this week showed the biggest contraction since 1958 during the first quarter. Former Bank of England Deputy Governor Rachel Lomax said yesterday that the economy is "showing some signs of stabilizing" after the central bank cut interest rates and started printing money to revive growth.
David Noble, chief executive office at CIPS, said in a statement yesterday "after months of doom and gloom, there are some signs of relief for the UK manufacturing sector. It may finally be coming out of a recession." However, the economy is still mired in the worst recession for at least thirty years and that is hurting manufacturers' profitability. The net rate of return was 6.8% in the first quarter, the lowest level since 1992.
Unemployment is still rising at the fastest rate in 12-years, after the economy shrank 2.4% in the first three months of the year. Tata Motors Ltd, the Indian truckmaker that owns Jaguar and Land Rover, posted its first annual loss in at least seven years last month, after sales at the luxury units plunged amid the global recession.
The Bank of England last month kept UK interest rates on hold at a record low of 0.5% and maintained the £125 billion asset insurance program to bolster the economy through the purchase of government and corporate bonds with newly created money. The next interest rate decision is scheduled for July 9th but the European Central Bank convene this lunchtime and are expected to keep rates unchanged at 1%.
The Euro is gaining against Sterling amid speculation that the ECB's governing council members will maintain the yield advantage and refuse to lower borrowing costs below the 1% threshold. The focus of attention will switch the accompanying press conference where the chairman, Jean-Claude Trichet, may talk about 'green shoots' in the economy, further bolster the appetite for the Euro.
Euro and Dollar buyers have been advised to look at the benefits of using stop orders to protect against a further move to the downside, as the degree of risk aversion sweeping back into the market curtails the Pounds momentum. The UK currency is still being hampered by renewed fears over the debt position. Job losses at UK banks reeling from the global financial crisis surpassed 55,000 with firms forecasting further cuts and that will also weigh on retail sales and consumer sentiment.
EUR/USD
The Dollar was unable to break through key support in the $1.4000 region against the Euro on Wednesday and retained a generally weaker tone throughout the day. The single currency gained some initial support from a slightly more positive report on German retail sales. The U.S economic data was mixed as the ISM index for the manufacturing sector rose to a reading of 44.8 in June, which was marginally above expectations.
There was some disappointment that the orders component of the ISM report slipped back below the 50.0 level, suggesting a significant risk that any recovery in the industrial sector will stall relatively quickly given the underlying vulnerabilities. The ADP employment report also recorded a private sector decline of 473,000 for June, after a revised 485,000 drop the previous month.
The ADP report provides an insight into the non-farm payrolls numbers this afternoon, which are expected to show a further deterioration in the labour market. The Dollar is also weakening amid reports that the Chinese authorities had called for the issue of reserve diversification and the introduction of a new reserve currency to be discussed at the G8 meeting next week.
The Pound declines against the majors, as UK gross doemstic product contracts by the most since 1958
GBPEUR/GBPUSD
The Pound rallied to a fresh 2009 high against the U.S Dollar in London but the UK currency was unable to sustain the upside rally, finding support around $1.6400 by the close of trading last night. The Pound also fell back under 1.1700 versus the Euro, after a government report showed that UK gross domestic product in the first quarter contracted by the most since 1958.
UK stocks also fell as the economy shrank by more than preliminary forecasts and investors speculated that the steepest quarterly increase in the FTSE 100 Index in nearly six years has outpaced earnings expectations. Rio Tinto Group and Anglo American Plc declined more than 2% as metal prices retreated. The benchmark FTSE 100 lost 1% on the day and the Pound dropped as risk appetite declined.
The Pound retreated from its highest level in more than eight months against the Dollar, touching a high of $1.6740, after the Office of National Statistics said that the UK economy declined 2.4%. According to RBC Capitals, the report may have set off automatic sell orders for the Pound. Adam Cole, global head of currency strategy at RBC, said that "the sell-off at the back of the growth numbers probably triggered stops on long-pound trades. The outperformance of sterling is a sustainable trend." A long position is a bet on an asset rising in value.
The Pound fell 1.3% against the Dollar to a low of $1.6387 in New York, after rising earlier as much as 1.1%, to the highest level since October 21st. The UK currency also declined 0.4% against the Euro but although the GDP report contributed to the decline, improved data from other parts of the economy has put the Pound on course for its biggest quarterly advance against the Dollar in more than 21-years.
Paul Robinson, a currency strategist at Barclays Capital, said that "the Pound will reach $1.8000 by year end." The Pound has gained almost 15% versus the Dollar since the low of $1.3505 in March, the most since the final quarter of 1987, when it strengthened more than 16%. The UK currency also appreciated 7.8% against the Euro in the three months through June.
A seperate report from the Nationwide Building Society yesterday showed that the average cost of a home in Britain rose 0.9% in June, after rising 1.3% in May. Economists' had previously predicted a 0.5% drop, while an index of consumer sentiment rose 2 points to record the strongest result since April 2008.
The revival in Sterling has correlated with the improvement in risk appetite and also the tentative signs of recovery in the UK economy. The Pound tumbled 26% against the Dollar in the last year and 23% versus the Euro, as house prices sank and the economy plunged into the worst recession in at least thirty years.
Business investment also fell sharply yesterday by 7.6% for the quarter, which reinforces the downward pressure on capital spending and corporate stresses. The current account data was also weaker-than-expected with a £8.5 billion deficit for the first quarter. The releases has a significant impact in weakening sentiment in the Pound.
There was also negative press reports on the UK debt position that undermined the Pound and volatility level are likely to increase. The UK currency will be much more vulnerable if global risk aversion increases and stocks slide. The Pound has already edged slightly lower this morning, although there is a strong area support around $1.64 against the Dollar and 1.1630 versus the Euro.
EUR/USD
The Euro maintained a firm tone in early trading yesterday, pushing to highs around the $1.4150 level before hitting tough resistance and edging lower. The U.S Chicago PMI Index was stronger than expected with an increase to a reading of 39.9 in June, from 34.9 the previous month. However, the mood of optimism was short lived as there was a surprisingly weak report on U.S consumer confidence.
The Conference board's index weakened to a reading of 49.3, from a revised 54.9 the previous month, disrupting a recent run of positive economic reports. The unexpected decline in confidence triggered some increase in risk aversion and the Dollar gains some underdyling demand as investors flocked to the security of lower-yielding assets.
The Federal Reserve Bank of San Francisco President Janet Yellensaid yeterday that the prospect that policy makers will leave the benchmark U.S interest rate zero for the next several years is "not outside the realm of possibility. We have a very serious recession, we have a 9.4% unemployment rate, and inflation possibly falling over time below the Fed's preferred level."
The Euro-zone data recorded a rise in German unemployment to the highest level in two years, although the monthly increase was lower-than-expected. The flash estimate for Euriopean consumer price inflation recorded a decline in the annual rate to -0.1%, the first ever annual decline. A risk appetite slowed, the Euro retreated to lows around $1.40 against the Dollar.
The Pound rallies to the highest level this year against the Dollar, as oil prices hit an eight month high
GBPEUR/GBPUSD
The Pound found support close to $1.6400 against the Dollar yesterday and pushed higher throughout the course of the day, testing levels near $1.66 in New York. The UK currency also rallied above 1.1800 versus the Euro overnight and recorded a fresh yearly high against the U.S Dollar, as global risk appetite continued to improve.
The Nationwide Building Society reported that UK house prices rose for a second consecutive month in June, which helped boost underlying sentiment, adding to signs that the worst of the property slump is over. The average cost of a home in the UK and Wales climbed 0.9% to £156,442, after rising 1.13% in May, despite forecasts of a 0.5% drop.
From a year earlier, house prices fell 9.3%, the smallest annual drop in July 2008, while the Pound also rallied strongly following reports that UK consumer confidence increased to the highest level in 14-months in June. Sentiment has improved as shoppers became more optimistic that the recession is past its worst, despite rising unemployment.
An index of sentiment rose 2 points to a reading of minus 25, the strongest result since April 2008 and the Pound subsequently smashed through the previous high of the year versus the U.S Dollar, rising to a high of $1.6740 overnight. Unemployment claims rose less than expected in May, and business surveys have indicated that the economic slump is starting to ease.
Bank of England officials believe that the credit squeeze threatens to delay a recovery and economic data released yesterday showed that net mortgage lending rose at the slowest pace since records began in 1993. The subdued increase of £0.3 billion for May, followed a £0.9 billion increase the previous month.
There was a modest recovery in mortgage approvals for the month, but underlying weakness in lending will cause significant concerns over the economy and the Organisation for Economic Cooperation and Development warned that further action was required to help strengthen the banking sector. Although the immediate Sterling reaction was limited, the data will pose underlying risks to the Pound, especially if global risk appetite falters.
Confidence is still firm this morning, which has enabled the Pound to push higher against the majority of the 16-most actively traded currencies and the UK currency has broken through key resistance levels versus the U.S Dollar. Rachael Joy, an analyst at Gfk, said in a statement that "confidence still remains fragile as uncertainty about the strength of any recovery and an increase in unemployment all mean that consumers remain wary."
Four out of five indexes used to compile the confidence report rose on the month, including measures reviewing and predicting personal finances and the general economic situation. The only decline was on the gauge showing the climate for major purchases, which fell four points to minus 26. Claims for jobless benefits rose in May by 39,300, a third less than economists' had predicted.
The Bank of England kept the key interest rate unchanged at a record low of 0.5% this month and reiterated its program to stoke economic growth by purchasing £125 billion of bonds with newly created money. The Deputy governor of the BoE Charles Bean told lawmakers last week that the worst of the recession may be past and consumer spending has been "more resilient than one might have expected."
At the same time, the Governor Mervyn King said that he feels "more uncertain now than ever" on the strength of the economic recovery as officials work to resolve the banking system. King affirmed forecasts that the economy won't return to growth on an annual basis until the second half of 2010. The Pound also found underlying support yesterday, as UK stocks gained for the first time in three days.
EUR/USD
The Euro was initially weaker in Asian trading on Monday, but found solid support just below the $1.4000 level against the U.S currency and pushed back to the $1.41 region during the day. Risk appetite gradually improved through the day, which helped lessen dollar demand and made it easier for the Euro to push higher.
There was also a recovery in the Euro-zone business and consumer confidence indicators, underpinning confidence in the Euro-zone recovery prospects. Immediate fears surrounding the threat of the Baltic State currency devaluations also provided some underlying relief to the Euro and investors will monitor any G8 comments on currencies closely ahead of their summit next week.
There were no major U.S data releases yesterday to help guide financial markets but the Chicago PMI index and consumer confidence data will be watched closely today for further evidence on economic trends. The Dollar is liable to weaken if there is a sharp recovery in these two indices as risk appetite would improve.
The Pound rallies against the majors amid an improvement in global risk appetite
GBPEUR/GBPUSD
Following on from last week, the Pound rallied against the Dollar on Friday, finding support around $1.6400 before improving steadily through the course of the day to challenge resistance levels above $1.6500. The UK currency also rose back towards 1.1750 versus the Euro, as improved economic data in the U.S spurred demand for riskier assets such as stocks priced in Sterling.
The FTSE 100 Index swung between gains and losses throughout the course of last week, as global risk appetite deteriorated and investors returned to the relative security of dollar denominated assets. The benchmark FTSE 100 Index declined 0.6% to 4,252.57 in London and the stock market has decreased 5.6% from June 1st, amid speculation that share prices have outpaced the outlook for earnings growth after the gauge reached 30.7 times its companies earnings.
In the FOMC statement on Wednesday, policy makers doused speculation that it will pump more money into the economy to hold down interest rates. The Pound was able to avoid a test of key technical support in the $1.6200 region and rallied back towards $1.6400 in New York on Thursday, as volatile trading conditions persisted. The UK currency also found key support under 1.1670 against the Euro, as there were no economic factors or official comments to guide the Pound during the course of the day.
The UK currency also fell against the Swiss Franc and the Australian Dollar, as the FTSE 100 index slipped 1.6% in London, the most in three days. The Pound was also unsettled to some extent by concerns surrounding fiscal debt, amid comments from the Bank of England governor Mervyn King on Wednesday, but the impact faded during U.S trading as equity markets rallied.
There will be a much greater chance of a change in sentiment if there is a sustained deterioration in global risk appetite. Confidence held relatively firm in early Europe on Friday and this helped Sterling hold near the $1.6400 level against the Dollar. King said on Wednesday that the U.K's path out of recession may be a "long, hard slog".
Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd, said that "the market's positioned long sterling and lower equities provide a good excuse to take some profit. The Pound hasn't performed since Mervyn King spoke on Wednesday." Kings comments have clearly weighed on Sterling sentiment, while the Organisation for Economic Cooperation and Development said that the UK gross domestic product will drop 4.3% this year.
The Pound snapped a two-day decline versus the Dollar on Friday, as the FTSE 100 Index of shares rebounded as much as 1.3%, before erasing earlier gains. The FTSE 350 Banks Index rose as much as 1.7% and the Pound's correlation with the banking gauge has been 79% or higher this year. Consumer spending in the U.S climbed in May for the first time in three months.
Ian Stannard, a foreign-exchange strategist at BNP Paribas SA, said "we have risk appetite re-emerging, which is sterling positive. There's still quite a lot of negative sentiment toward the fiscal and debt position of the UK, which has been highlighted this week by policy makers, which has kept sterling depressed on the week."
The Pound has risen 13% against the Dollar this year, and 11% versus the Euro, as the global financial system shows tentative signs of stabilising. The Pound weakened to a record low of 1.02 versus the Euro on December 30th and reached a 23-year low of $1.3505 against the Dollar on January 23rd. The UK currency fell earlier in the week after Bank of England chief economist Spencer Dale said a weaker currency is making UK assets more attractive to foreign investors.
The Bank of England said on Friday that financial institutions' losses from the crisis have left them vulnerable to another wave of shocks, including the risk that the economy will remain mired in a recession. "Given their leverage and funding positions, banks in the UK and internationally will remain sensitive to further stocks for some time", the central bank said in a statement.
UK house prices fell for a thirteenth consecutive month in May, as the average cost of a home in England and Wales fell 0.2% from April to £152,497. BoE policy maker Kate Barker said last week that the property market was still "some way away from normal" and the bank said that financial institutions are vulnerable to more shocks.
Despite the Banks warning that the banking sector will remain fragile and vunerable to external shocks, the Pound managed to avoid further selling pressure. The key factor is that overall risk appetite remained firm which underpinned the Pound and lessened the impact of bank warnings. Simarly, fears over the budget situation have also lost some of their impact for the timebeing.
EUR/USD
The Dollar fell against most of the major currencies on Friday, after China repeated its call for a supernational currency "delinked" from sovereign nations. The U.S currency headed towards its biggest weekly loss against the Euro in four weeks, after the People's Bank of China said the International Monetary Fund should manage more of members' foreign exchange reserves.
The Dollar was unable to gain any support during Friday and dopped significantly lower in European trading. There was also an implicit attack on the U.S economic policies, which fuelled speculation over underlying reserve diversification. The comments from China renewed market fears over the underlying threat of a central bank diversification away from the U.S currency and this is an importnant element in undermining dollar confidence during the day.
The Euro challenged levels above $1.4100 against the Dollar on Friday, before consolidationg around $1.4065 by the close of trading. The preliminary German consumer prices data was stronger than expected with a 0.4% rally and this will tend to dampen expectations of a more aggressive ECB stance on monetary policy.
Data Released 29th June
UK 09:30 Consumer Credit / Mortgage Applications (May)
The Pound declines against the majors, as stocks drop by the most this week
GBPEUR/GBPUSD
The Pound dropped against the Dollar and the Euro yesterday, as global stocks markets declined for the third day this week and the Bank of England governor Mervyn King said that the UK economic recovery will be slow. The UK currency was unable to rally above the $1.6500 level on Thursday and then weakened steadily through the course of the day with lows around 1.6230.
UK stocks declined for a third day this week, led by banking shares, as the Federal Reserve disappointed investors by refraining from increasing bond purchases. Bank of Ireland Plc slumped 7% in Dublin trading, as the International Monetary Fund warned that the nation's lenders face losses of as much as $49 billion through 2010.
The benchmark FTSE 100 Index declined 0.6% to 4,252.57 in London and the stock market has decreased 5.6% from June 1st, amid speculation that share prices have outpaced the outlook for earnings growth after the gauge reached 30.7 times its companies earnings. In the FOMC statement on Wednesday, policy makers doused speculation that it will pump more money into the economy to hold down interest rates.
The Pound was able to avoid a test of key technical support in the $1.6200 region and rallied back towards $1.6400 in New York, as volatile trading conditions persisted. The UK currency also found key support under 1.1670 against the Euro, as there were no economic factors or official comments to guide the Pound during the course of the day.
The UK currency also fell against the Swiss Franc and the Australian Dollar, as the FTSE 100 index slipped 1.6% in London, the most in three days. The Pound was also unsettled to some extent by concerns surrounding fiscal debt, amid comments from the Bank of England governor Mervyn King on Wednesday, but the impact faded during U.S trading as equity markets rallied.
There will be a much greater chance of a change in sentiment if there is a sustained deterioration in global risk appetite. Confidence held relatively firm in early Europe on Friday and this helped Sterling hold near the $1.6400 level against the Dollar. King said on Wednesday that the U.K's path out of recession may be a "long, hard slog".
Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd, said that "the market's positioned long sterling and lower equities provide a good excuse to take some profit. The Pound hasn't performed since Mervyn King spoke on Wednesday." Kings comments have clearly weighed on Sterling sentiment, while the Organisation for Economic Cooperation and Development said that the UK gross domestic product will drop 4.3% this year.
EUR/USD
The Dollar retained a firm tone in Europe trading on Thursday and tested levels just below $1.3900 in New York, as Euro sentiment was generally weaker, although moves were limited with the Dollar still finding it difficult to gain strong support. Fears over underlying reserve diversification away from the Dollar will continue to undermine sentiment, while expectations persist that interest rates will remain low.
U.S initial jobless claims rose to 627,000 in the latest week from a revised 612,000 previously, while continuing claims rose to near 6.74 million. The unemployment data has been showing signs of improvement and the latest release will cause some fresh anxiety over the labour market situation. Elsewhere, U.S gross domestic product in the first quarter was revised slightly to show a modest improvement.
The Pound strengthens against the Dollar but any gains may be short-lived
The Pound strengthened against the Euro yesterday, bouncing back from a low of $1.1630 on Tuesday, after banking stocks rallied and the Organisation for Economic Cooperation and Development raised its forecast for UK economic growth next year. The Pound also gained against the lower-yielding currencies, including the Dollar, as we touched $1.66 prior to the FOMC rate announcement last night.
A report from the Confederation of British Industry showed that UK retail sales recorded a figure of -17 for June, unchanged from the previous month, and the Pound subsequently rallied, as retailers expected a further decline for July. The OECD forecasts were mixed as the 2009 GDP was revised to lower to show an even sharper contraction, although there was an upgrade for the 2010 figure.
According to the OECD, the UK economy will recover "mildly" next year with a previous forecast of a 0.2% contraction. Gross domestic product will drop 4.3% this year, against a March forecast of 3.7%. The Pound's advance was tempered in New York, after comments from Bank of England officials again had a significant market impact.
The Governor of the BoE Mervyn King and other committee members were very cautious over the economic outlook with King repeating comments that the recovery in the economy was liable to be protracted, while there was a very high degree of uncertainty over the outlook. King again warned over the fiscal position and called for the government to tighten policy if there was any sign of an economic recovery.
In his statement, King said that "there has to be a risk that it will be long, hard slog. I feel more uncertain now than ever. This is not the pattern of a recession coming into recovery that we've seen since the 1930s. Having an open mind and not pretending to foresee the future when its so uncertain is important."
The Pound also found buying support as the FTSE 350 Banks Index rose 1.2% in London, while UK stocks also rose led by a rebound in mining companies. The benchmark FTSE 100 Index also added 1.2%, rising for the first time in three days, as global risk appetite improved. Gavin Friend, a markets strategist at National Australia Bank, said that "if the banking sector is outperforming even while the main index is not, then that can help the Pound."
The Pound rallied 0.8% against the Euro yesterday, rising to a high of 1.1790, while the UK currency stood predominantly unchanged versus the Dollar at $1.6452, after earlier rising as much as 0.9% to a high of $1.6602. The FTSE 350 Banks Index climbed after dropping 3.5% this week. The correlation between the Pound's performance and the banks measures is greater than 79% and that is the reason that any short-term momentum in Sterling is continually under threat.
The outlook, together with stresses between the Central Bank and the government will tend to undermine sentiment in Sterling to some extent. The Pound retreated back towards $1.6400 against the Dollar this morning, as the benign FOMC rate announcement and tentative performance in global stocks encouraged investors back to the Dollar.
The Pound extended it advance against the Euro yesterday, after the ECB said that it will lend banks €442 billion for 12-months, as it steps up efforts to unfreeze credit markets. However, the UK currency has fallen back towards 1.1700 this morning and Euro buyers may wish to consider a stop order at 1.16 to protect against a sustained downward move.
In yesterday's market update, we warned of the inherent downside risks on Sterling/Dollar following the FOMC rate announcement, especially if global risk appetite deteriorates aswell. The Pound looks poised to revisit the trend support at $1.6200 over the coming days and Dollar buyers would be well placed to use a stop order just under this level to protect against a move back towards $1.6000.
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Foreign Exchange Outlook Podcast - 3rd July
