GBPEUR/GBPUSD

The Pound rallied strongly against the U.S Dollar yesterday, rising above $1.65 in London, amid speculation that the Federal Reserve will signal its benchmark interest rate will remain on hold at record low levels for an extended period. The UK currency also touched 1.12 versus the Euro, as gains in stocks and growth in service industries showed that the economic recovery is gathering pace, prior to today's Bank of England rate announcement.

The benchmark FTSE 100 index increased 0.7% to 5,074.04 in London, rebounding from a one-month low, led by a rally in retailers. Marks & Spencer Group Plc posted better-than-expected earnings and Next Plc raised its year-end projections. The FTSE 100, which last week capped its worst weekly decline since an eight month rally began on March, has still surged over 44% since the low on March 3rd.

A report yesterday from the Nationwide Building Society also showed that UK consumer confidence remained at an 18 month high in October, as house prices recovered. Elsewhere, an index of UK service industries rose in October to the highest level since the financial crisis began in August 2007, as a gauge based on a survey of 700 companies, rose to a reading of 56.9.

The report adds to recent evidence that the country's worst recession since the end of the Second World War may be coming to an end. Policy makers will probably seek to cement the recovery this lunchtime, by increasing the bond purchase program beyond the current £175 billion, with speculation surrounding the size of the increase.

Vicky Redwood, an economist at Capital Economics Ltd, said yesterday that "the economy should now have pulled out of recession. But a quick return to rapid rates of growth still looks unlikely and we still think that the Monetary Policy Committee will err on the side of caution." Despite speculation over an extended period of quantitative easing, the Pound has continued to make gains against the majors.

Yesterday's report from the Chartered Institute of Purchasing Supply showed the sixth month of expansion in UK service industries. David Noble, chief executive offers at CIPS, said in a statement that "the service sector is pulling the UK economy out of recession as its own recovery accelerates. Given that the PMI services survey accounts for almost 40% of the the UK economy, this bodes well for the wider market pick-up."

A median number of economists believe that the Bank of England will extend the quantitative easing program by another £50 billion to £225 billion in the monthly announcement tomorrow. The last time that the MPC elected to increase bond purchases, the Pound subsequently lost 6% in value against the Euro.

The improving sentiment towards the Pound is due to speculation that rising stocks and an improving economy will make it less likely for the Bank of England to extend its asset-purchase plan this lunchtime. Pacific Investment Management Co said that the Central Bank may suspend purchases of government bonds because it has succeeded in stabilising the economy, despite the fact that the latest GDP numbers confirmed that the UK remain entrenched in the worst slump on record.

The Pound rose 0.9% against the Dollar yesterday but that momentum will be severely tested throughout the course of the day. Policy makers will debate the relative success of the quantitative easing program, with some members disagreeing on the benefits of implementing further stimulus measures.

The Deputy Governor Charles Bean said on October 13th that rising asset prices suggest the plan had a significant effect and signaled optimism that the economy had troughed. Since Bean's statement the Pound has fluctuated between gains and losses, after the Office of National Statistics reported on October 23rd that the UK economy unexpectedly contracted in the third quarter.

The Pound has rallied strongly over the past week, amid speculation that the Central Bank will begin raising interest rates at the end of 2009 and by more than 170 basis points over the next year. Euro and Dollar buyers can take full advantage of the current market rate prior to the midday announcement or at least consider the use of a stop order in case of an adverse reaction.


EUR/USD

The Dollar plunged from a near one-month high versus the Euro, as rising stock markets diminished demand for lowering yielding assets, before the Federal Reserve rate announcement on Wednesday evening. Sverre Holbek, an analyst at Danske Bank A/S, said that "a weaker Dollar trend starts to re-emerge after the temporary setback in risk sentiment over the past few days. The Fed won't change its statement drastically, which is going to further fuel risk taking."

The U.S currency weakened 0.7% against the Euro to $1.4829 in New York and may decline towards $1.55 over the next quarter. A report from the Institute for Supply Management, U.S service industries grew in October at a slower pace than expected, while the ADP employment report estimated that another 203,000 jobs were lost last month.

Mounting unemployment may mean that consumer spending will only accelerate with government assistance, indicating that the emerging recovery may lose momentum, as the Fed moves back towards conventional policy techniques. The lack of jobs makes it increasingly likely for the Fed to keep interest rates at near zero for an extend period.

As expected, the Federal Reserve left the Fed funds rate on hold in a range between zero and 0.5%, following the FOMC rate annouincement last night. The Fed maintained that the economy was improving while the declines in employment and business investment had slowed. Critically, the Fed maintained the commitment to maintain interest rates at ultra low levels for an extended period.

The Euro also received a boost after an index of European services and manufacturing industries expanded for a third straight month in October, amid evidence that the global economy is pulling out of the recession. Europe's economy returned to growth in the third quarter, after record low rates and emergency stimulus measures helped combat the steepest slump since the Second World War.

The European Central Bank also meets this lunchtime and will probably keep interest rates unchanged at 1%. The focus of attention will again fall on the accompanying press conference and Trichet is struggling to keep a lid of fellow policy makers flouting suggestions that the Central Bank is preparing to exit emergency stimulus measures.


Data Released 5th November

U.K 09:30 - Industrial Production (September) - Manufacturing Production

U.K 12:00 - BoE Rate Announcement

U.K 15:00 - NIESR GDP Estimate (3 Months to October)

EU 10:00 - Retail Sales (September)

EU 12:45 - ECB Rate Announcement

EU 13:30 - ECB Press Conference

U.S 13:30 - Initial Jobless Claims (w/e 31st October)

written by Adam Solomon

Labels: daily-insight