The Pound resumed its downward momentum against the Dollar yesterday and again tested support levels close to $1.6200 and was able to find strong buying support once more near this important technical level, with gains to $1.6500 in New York as the Dollar stumbled. The UK currency declined for a second consecutive day against the Euro, after the Bank of England's chief economist Spencer Dale said that a weaker Pound is making UK assets more attractive to foreign investors.

Daragh Maher, deputy head of global foreign exchange strategy at Carlyon, said that "the BoE's comments have been used as an excuse to sell Sterling. The market has been looking for an argument to sell Sterling and Dale's comments fit the bill." The Pound had weakened 1.3% against the Euro, falling through significant support at 1.1764, to a low of 1.1630.

Sterling also registered losses versus the Japanese Yen and Swiss Franc, as Dale also said that the exchange rate was a "key channel" that could be utilised to revive economic growth. UK stocks dropped 0.1%, erasing earlier gains, as the FTSE 100 Index of shares fell to 4,230.02 in London, having swung between gains and losses at least nine times during the course of the day.

The tentative swings in risk sentiment will tend to undermine confidence in the Pound and the higher-yielding currencies, encouraging investors to seek the relative security of safe haven assets. The FTSE has rallied 20% from this year's low on March 3rd and is currently trading at 30.1 times its companies' earnings, compared with 17 times profit in the week the rally began in March.

The World Bank said on Monday that the global economy is expected to resume growth next year with a 2% expansion, lower than the 2.3% forecast previously. However, the Confederation of British Industry are slightly more optimistic on the prospects for a recovery in the UK economy and that will continue to bolster the Pound, despite a heavy increase in unemployment.

The Pound came under renewed selling pressure on Monday, after the Rightmove Plc, the UK's largest property website, said that the average cost of a home dipped 0.4% in June, recording the first decline in five months. The UK currency has climbed 3.2% against the Dollar over the past month and looks poised to rally towards the high above $1.66, ahead of the FOMC rate announcement this evening.

The UK economy shrank 1.9% in the first quarter and the ongoing recession may see gross domestic product contract 4.5% in 2009, the most since 1931, according to forecasts by the Centre for Economics and Business Research. The Chancellor Alistair Darling said on April 22nd that the budget deficit this year will reach £175 billion, or 12.4% of GDP, the highest proportion among the Group of 20 nations.

Standard & Poor's also cut the outlook on UK sovereign debt to "negative" from "stable" on May 21st and there are a number of negative factors that could potentially curtail the Pound's momentum. In particular, Dollar buyers would be well placed to take advantage of today's rate, in light of the FOMC interest rate announcement this evening because we could see a move back towards $1.6200 if stocks continue to deteriorate.

EUR/USD

The Euro found good support around $1.3825 against the Dollar yesterday and strengthened impressively through the course of the day, as all eyes focus on the U.S interest rate announcement tonight. The single currency actually recorded the largest advance in six weeks, to a high above $1.41 in New York, after a host of European economic reports raised optimism on the prospects for a recovery.

The PMI manufacturing indices were firmer than expected with the flash index rising to a reading of 42.4, from 40.7 the previous month. The services sector index edged moderately lower, despite expectation of a measured increase, which will be of some concern with fears that improvements in the sector are being driven by inventory adjustment.

The European economy is showing real signs of stabilisation, after shrinking at the fastest pace in at least 15-years in the first quarter. German and French business confidence rose for a third consecutive month in June and the ECB president Jean-Claude Trichet said that the worst of the recession may be over, after policy makers cut rates to a record low and embarked on a policy of buying covered bonds.

The comments from a number of ECB officials were generally supportive of the Euro, with governing council member and Bundesbank President Axel Weber stating that the bank had no more room to cut interest rates. The Central Bank's one-year refinancing operation will be watched closely on Wednesday and strong demand for funds could undermine the Euro.

The Dollar has declined against the majority of the 16-most actively traded currencies on speculation that the Federal Reserve will temper expectations for an interest rate increase this year, in an attempt to lower borrowing costs. Traders are speculating that that the FOMC will keep the benchmark rate close to zero for the remainder of the year to support a return to economic growth.

Data Released 24th June

U.K 11:00 CBI Distributive Trades Survey (June)

EU 09:00 Current Account (April)

U.S 13:30 Durable Goods (May)

U.S 15:00 New Home Sales (May)

U.S 19:15 FOMC Interest Rate Announcement

written by Adam Solomon

Labels: daily-insight