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.

Data Released 1st July

U.K 00:01 Gfk Consumer Confidence (June)

U.K 09:28 CIPS Manufacturing PMI (June)

GER 07:00 Retail Sales (May)

EU 08:58 Markit Manufacturing PMI (June)

U.S 13:15 ADP Employment (June)

U.S 15:00 Construction Spending (May)

U.S 15:00 ISM Manufacturing (June)

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

written by Adam Solomon

Labels: daily-insight