GBPEUR/GBPUSD

The Pound rallied to the highest level in two months against the Euro yesterday, touching a high of 1.1317 in London, while the UK currency also made gains versus the U.S Dollar, after Bank of England policy maker Andrew Sentance said that Britain is returning to growth. He also warned that Britain runs the risk of stoking inflationary pressures if the Central Bank keeps emergency stimulus measures in place for too long.

Sentance also said that it is not yet time to consider reining in emergency stimulus measures, as the economy starts to recover from the worst recession on record. He said, "I don't think we're in a position where we need to consider a monetary policy tightening. We have to be open-minded" about additional quantitative easing.

His statement aired on the side of caution and mimicked the sentiment of the Bank of England governor Mervyn King, when he delivered his quarterly inflation report last week. Sentance also said that inflation may stay weak until the strength of the economy risks pushing it above the bank's 2% target after two years.

The Pound extended gains against the majority of the 16 most actively traded currencies, after a report from the Office of National Statistics showed that UK inflation rose for the first time in eight months. The rate of inflation rose more than initial forecasts, as fuel costs and air fares climbed, while consumer prices gained 1.5%, compared with 1.1% in September.

James Knightly, an economist at ING Financial Markets, said that "this is the first of a period of sharp increases in headline inflation over the next few months. Given the spare capacity in the economy, there's no real need to tighten monetary policy any time soon. Inflation is likely to move quite sharply lower against the back end of next year."

Sentance said in a speech at Royal Holloway on Monday that business and consumer surveys and unemployment data suggests that Britain has returned to growth. In an interview yesterday, he said that "it will take time before there is a widespread perception that we're out of recession. But the broad balance of evidence is that the UK economy has started to grow in the second half of the year."

The Bank of England will release tomorrow's minutes of the November meeting, when policy makers expanded the asset-purchase program by £25 billion. The UK economy unexpectedly shrank 0.4% in the preliminary estimate for the third quarter, extending the recession to a record six consecutive quarters. Sentance said that it would be wrong to focus solely on the GDP data because "it's more appropriate to look at a wide range of indicators."

Henrik Gullberg, a currency strategist at Deutsche Bank AG, said that the Sentance speech "added to the positive bias in Sterling. The data generally has been very strong." The Pound rose as much as 0.6% against the Euro to the strongest level since September 15th, while the UK currency advanced to a high of $1.6860 versus the U.S Dollar.

The Pound slipped back towards $1.6750 towards the close of trading last night, after UK stocks fell from a 14-months high. Commodity producers retreated with metal prices and U.S industrial production rising by less than expected in October. The benchmark FTSE 100 Index declined 0.7%, trimming some of Monday's 1.6% rally.

The Pound also rose towards a three month high of $1.6850 against the U.S Dollar, but the UK currency may struggle to consolidate on the recent gains, ahead of the minutes from the Bank of England's last policy meeting tomorrow. The Pound is currently testing the long-term trend resistance at 1.1270 and failure to break this level could lead to a move back down towards 1.1050.

Tom Fitzpatrick, a technical analyst at Citigroup Inc, said yesterday that the Euro may fall towards 1.1450 against the Dollar, after breaching the "neckline of a double top" A double top forms when the securities make two consecutive peaks. A break of the neckline, the trough between the peaks, often indicates a trend lower may be coming.

Euro and Dollar buyers may wish to take advantage of the current rate, or at least consider the benefits of a stop order in protecting against an adverse market reaction tomorrow. The likely scenario is that at least one or two of the nine-strong MPC would have voted for a more aggressive increase in bond purchasing this month, with the majority favouring a £25 billion increase.


EUR/USD

The Dollar advanced against the Euro yesterday for the first time in three days, after U.S industrial production rose by less than economists had predicted in October, discouraging demand for higher-yielding assets. Output at U.S factories rose just 0.1%, following a 0.6% increase in October, after a reduction in auto manufacturing.

Production fell for the first time in four months and auto manufacturing declined following the biggest three month surge since the 1970s. Companies are staying cautious about the strength of the recovery, with unemployment currently at a 26-year high. Stocks also declined after the report, as the Standard & Poor's 500 Index slipped 0.2% in New York.

The U.S currency strengthened 0.9% against the Euro to a high of $1.4837, after the European Bank President Jean-Claude Trichet was quoted as saying that a strong Dollar is in the world's best interest, and Bernanke's comment was a "very strong statement." Brian Dolan, chief currency strategist at Forex.com, said that "we failed again at $1.50 overnight against the Euro, with Trichet talking up the Dollar. It's a question of consolidation, marking time until we take out the October highs in the Euro."


Data Released 18th November

U.K 09:30 BoE Monetary Policy Committee - Minutes of 4th/5th November Meeting

U.K 11:00 CBI Industrial Orders (November)

EU 09:00 Current Account (September)

U.S 13:30 Consumer Price Index (October) - Ex Food & Energy

U.S 13:30 Housing Starts (October) - Permits

U.S 13:30 Real Earnings (October)


written by Adam Solomon

Labels: daily-insight