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.

Data Released 30th June

U.K 06:00 Nationwide House Price Survey (June)

GER 09:00 Unemployment (June)

EU 09:00 M3 / 3 Month Moving Average (May)

EU 10:00 Flash HICP (June)

U.S 14:00 Case Shiller House Prices (April)

U.S 14:45 Chicago PMI (June)

U.S 15:00 Consumer Confidence (June)

written by Adam Solomon

Labels: daily-insight