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.

Data Released 25th June

EU 10:00 Industrial Orders (April)

U.S 13:30 Gross Domestic Product (Q1 Revised)

U.S 13:30 Initial Jobless Claims (w/e 19th June)

written by Adam Solomon

Labels: daily-insight