The Pound found solid buying support above the pivotal $1.60 level against the Dollar yesterday and was able to secure a consistently stronger tone through the course of the day. The UK currency also edged higher versus the Euro, rising above 1.1630 in New York, snapping a five-day losing streak, after the Bank of England decided against extending its asset-insurance program.

The Monetary Policy Committee, led by the governor Mervyn King, left the benchmark lending rate unchanged at a record low of 0.5%. Policy makers also announced that its quantitative easing program would be maintained at £125 billion, contrary to some expectations that the amount of bond buying would be increased and this provided immediate buying support for Sterling.

The Pound rose by the most in almost three weeks against the Dollar, peaking above the first point of resistance at $1.62, after earlier falling to a one month low. Policy makers said they will review their so-called quantitative easing program next month, while assessing the latest inflation expectations. Therefore, the Pound may struggle to sustain its upward momentum in the build-up to the August meeting, amid speculation that the Central Bank will increase bond purchases.

Economists are speculating that the Bank of England's emergency bond-buying program may come to an end next month, as the UK economy shows tentative signs of recovering from the worst recession in a generation. Officials elected not to expand the £125 billion spending program yesterday and said that they will pause purchases at the end of July.

A number of financial institutions, including Credit Suisse Group AG, Citigroup Inc and Fortis Bank, have said that this move would suggest that the BoE are preparing to wrap up policy. Nick Kounis, an economist at Fortis in Amsterdam, said that "we're at a turning point. We know the economy has probably stabilised, even though they can't see the effects of what they're doing, they may be starting to worry about overkill."

The governor of Bank of England Mervyn King has indicated that he will assess the plan's success in August and any decision to finish it would shift the focus of policy towards the exit strategy. Some policy makers have expressed concerns that creating too much money to buy bonds and corporate debt will spark inflation. Officials stress that they can contain those risks by offloading the debt they have bought and raising interests, a move that would substantially increase the value of Sterling.

The UK inflation rate fell by less than initial expectations in May and could still peak above the Bank's 2% target. Policy makers predicted on May 13th that the rate will drop well below target and won't return to it in two years. The Central Bank's concerns about deflation may yet lead them to expand the purchase plan and we can expect a lot of speculation to influence the market over the coming month.

Bank of England deputy governor Charles Bean said on June 24th that it appeared that "it looks like we may be around the trough" of the recession, while policy maker Andrew Sentence said that "there are signs of stabilisation, but it doesn't tell us how strong the recovery will be." UK gross domestic product contracted 2.4% in the first quarter, the most in 50-years, while house prices dropped 0.5% in June, after jumping 2.6% the previous month.

Manufacturing output fell in May for the first time in three months and the economy's contraction eased to 0.4% in the second quarter, the slowest pace in a year. The International Monetary Fund this week raised its forecast for the UK for 2010 and predicted a return to economic growth. Jeremy Stretch, a senior strategist at Rabobank International in London, said "there was always a risk sterling would get a spike if they didn't do anything and that's what we've got. Sterling might get a short-term boost, but I wouldn't want to overplay it.".

The Pound climbed 1.1% to a high of $1.6249 versus the U.S Dollar, while the UK currency also strengthened 0.4% versus the Euro, after the UK trade deficit narrowed in May to the smallest in three years. The gap in goods and services was £6.3 billion, the least since June 2006, compared with £7.1 billion in April.

EUR/USD

The Euro fell against both the Pound and the U.S Dollar and headed towards its worst week against the Yen in two month, after the International Monetary Fund reported that it was discussing aid programs with at least 10 Eastern European governments. The single currency weakened versus 12 of the 16 most-actively traded currencies, after a German newspaper cited unidentified IMF officials as saying countries applying for loans for the first time included Bulgaria, Croatia and Macedonia.

Tsutomu Soma, a bond and currency dealer at Okasan Securities Co in Tokyo, said that "there are lingering worries over the financial health of eastern and central European countries. Investors are still risk averse, so they're likely to sell the euro and buy the Yen and Dollar as safe haven currencies." The Euro headed towards a second weekly loss against the Dollar, after Finance Minister Peer Steinbrueck said yesterday that Germany's regional state banks are the "biggest systemic risk" to the nation's financial industry.

The losses in the Euro accelerated after so-called stop-loss orders on investors' positions were activated around the $1.4000 level. The Dollar was unable to hold stronger than the $1.39 level against the Euro and retained a generally weaker tone as markets found it difficult to challenge resistance levels. U.S initial jobless claims fell to 565,000 in the latest week, from a revised 617,000 the previous week and this was the first result below the 600,000 mark since January.

Data Released 10th July

U.K 09:30 Producer Prices - Input (June)

- Output

U.S 13:30 External Trade Balance (May)

U.S 13:30 Export Prices (June)

- Import Prices

U.S 15:00 Treasury Secretary Geithner Testifies Before Congressional Panel

U.S 15:00 Michigan Sentiment Survey (Prel - July)

written by Adam Solomon

Labels: daily-insight