GBPEUR/GBPUSD

The Pound remained subdued against the Euro yesterday and traded within half a cent of its lowest level in a week versus the U.S Dollar, after the Bank of England Governor Mervyn King said on Wednesday that a weaker currency will help the UK economy recover from the recession. The Pound suffered its biggest decline in almost three weeks against the Dollar, trading as low as $1.6518 in London.

King is receptive to the idea of injecting more emergency stimulus into the economy, while the U.S Federal Reserve and European Central Bank suggest that they're ready to exit such policies. King said yesterday that he has an "open mind" on further quantitative easing, as he presented his forecasts for economic growth and inflation.

He signaled that the Central Bank still has room for additional asset purchases from the current £200 billion, which suggests that policy makers were divided on the decision to extend the plan by £25 billion earlier this month. The projections on consumer prices shows that policy makers are also concerned that inflation will undershoot the 2% target for the next two years.

The Fed chairman Ben Bernanke has committed to scale down the purchase of mortgage backed securities in the first quarter of 2010. The ECB Chairman Jean-Claude Trichet has signaled that some of the long-term financing auctions will end next month. Australia and Norway have already started raising interest rates but yesterday's report from the Bank of England means that policy makers are unlikely to shift to a tightening bias before the third quarter of next year.

Sarah Hewin, an economist at Standard Chartered Bank, said that "this cautious tone is aiming at keeping the options open for the Bank of England. They obviously still do feel that there are risks out there. They don't want to feel that they can't, if they need to, go for further asset purchases."

The Bank's decision has pushed the Pound down against all of 16 most actively traded currencies and the UK currency has fallen as much as 1% versus the Dollar, as an element of risk aversion filters back into the market. Investors have become pessimistic about the Pound for the first time since April, amid speculation that the BoE will keep rates on hold over the coming months.

Policy makers must weigh up the risk of withdrawing emergency stimulus too soon will push the economy back into recession, while the danger that ultra loose monetary policy might spark asset price bubbles. King's stance suggests that he is reluctant to follow the Fed and the ECB in signaling that an end to emergency measures is close.

Sue Trinh, a senior currency strategist at RBC Capital Markets said, "we note that the fall in the Pound that followed a very similar message in the August inflation report was not a short-term phenomenon and the Pound continued to slide for the best part of three months. A similar profile for the Pound from here cannot be ruled out."

Geoffrey Yu, a currency strategist at UBS AG, said that "Mervyn King seems intent on talking down the currency." The Pound declined to a low of 1.1030 against the Euro yesterday and may continue to weaken following the pessimistic view on the UK economy. The Euro lost 3.5% against the Pound in October but UBS analysts forecasts that the single currency will appreciate to 1.0620, as technical analysis suggests a reversal.

Taso Anastasiou, a technical strategist at UBS AG, said that the Euro will have to advance through 1.1035 to confirm the momentum, after it broke a so-called trend line resistance of 1.1096 yesterday. Anastasiou said that "as long as the euro-sterling holds below 1.1179, the prospect for recovery for the Euro is good."

Trend lines show price movements, connecting the highest and lowest values of a security or asset. In technical analysis, investors and analysts will study these charts or trading patterns to forecast changes in a security, commodity or currency. On this basis, the Pound will need to break above 1.1179 to turn the trend positive for the UK currency to go higher.


EUR/USD

The Dollar rallied against the majority of U.S trading partners yesterday, after the Chinese Premier Wen Jiabao said that the world economy faces a difficult recovery, sparking demand for lower-yielding currencies. The Dollar advanced against the Euro, after its decline yesterday halted at a level that would suggest further weakness.

The U.S currency gained 0.7% in value against the Euro to a high of $1.4866, from $1.5010 earlier in the day. The U.S Treasury Secretary Timothy Geithner also said in an interview in Singapore that it's "very important" that the U.S maintains a "strong Dollar." The Euro came under pressure, after France's Finance Minister Christine Langarde said that she "hopes" tomorrow's third quarter GDP figures show that the expansion has accelerated in the third quarter.

U.S initial jobless claims decreased to 502,000 in the week ending November 7th, from a revised 514,000 in the previous week. The U.S lost 190,000 jobs in October and the unemployment rate jumped to 10.2%, taking the total job losses to 7.3 million since the start of the recession in December 2007. The jobless rate will probably stay above 10% through the first half of 2010.


Data Released 13th November

EU 10:00 Flash Gross Domestic Product (Q3)

U.S 13:30 Export Prices (October) - Import Prices

U.S 13:30 International Trade Balance (September)

U.S 14:55 Michigan Sentiment (November Prelim)


written by Adam Solomon

Labels: daily-insight