GBPEUR/GBPUSD

The Pound rallied for the first time in five days against the U.S Dollar, as UK stocks surged higher, amid growing confidence that the global economic recovery is gathering momentum. The overall improvement in risk appetite helped underpin Sterling, as the UK currency gained towards 1.6650 in London, after the FTSE 100 Index added as much as 1.8%.

UK stocks also advanced for the first time in five days, underlining the correlation between the Pound-Dollar exchange rate and commodity prices. Basic resources companies gained on expectations that a global economic revival will extend an eight month rally that took stocks to the highest level in over a year.

Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank, said that "the correlation between sterling and stocks is still intact. The Pound tends to trade well when stocks are higher. There is sentiment that the GDP revisions could surprise to the upside and Sterling may trade well ahead of that number."

Rio Tinto Group jumped as much as 3% as metals prices climbed, while Cadburys Plc, the subject of a hostile bid from Kraft Foods Inc, climbed to a record level. The FTSE 100 Index has rebounded 52% from the lowest point this year on March 3rd, amid signs that government stimulus measures and record low interest rates are slowly dragging the economy out of the worst slump on record.

Cadburys Plc added 1.6% to share prices, amid speculation of a renewed bid from Kraft Foods Inc. Nestle SA was also said to be considering a takeover, while Reuters ran the story of an improved offer from the world's second largest food company. The Pound also found support yesterday, amid suggestions that a report on Wednesday will show that the UK economy contracted by less than forecast in the third quarter.

The UK currency remained largely unchanged against the Euro yesterday, edging slightly lower in London to a low of 1.1067. The Pound is still reeling from reports last week that the Bank of England may increase quantitative easing from the current £200 billion, in an attempt to cement the economic recovery.

UK gross domestic product contracted 0.4% in the preliminary reading for the third quarter and economists expect a marginal adjustment to -0.3% in the report tomorrow. Bank of England policy maker Andrew Sentance was reported as saying that a "modest" economic recovery is under way and his cautious tone is reflective in the minutes from the Bank's last policy setting meeting.

The Pound has risen 14% in value against the Dollar this year, even as the Bank of England cut interest rates to a record low and embarked on a policy of buying government bonds with newly created money. The UK currency plunged 1.9% against the Dollar after the GDP data was released in October and a large revision to the upside should invoke a similar volatile reaction this time around.

The Pound last week posted its biggest weekly decline against the Dollar since September, amid concerns that the UK's worst budget deficit since records began will curtail the country's recovery from a recession. Britain had an £11.4 billion shortfall in October, compared to a deficit of just £130 million a year earlier. The median forecast was for a £7 billion deficit and the record amount comes in a month when the Treasury benefits from quarterly payments of taxes on company profits.


EUR/USD

The Dollar fell by the most in two weeks against the Euro yesterday, after the President of the Reserve Bank of St Louis James Bullard, said that policy makers should maintain current stimulus measures beyond March. The U.S currency also came under renewed selling pressure, as commodities and stocks advanced, reducing the allure of Dollar denominated assets.

Bullard said yesterday that the Fed should extend its purchases of mortgage-backed securities to give policy makers "the option to react to future news," maintaining concern that the market is being flooded with Dollars. The U.S currency weakened 0.8% against the Euro to $1.4989 in New York, the biggest intraday decline since November 9th.

The Fed said on November 4th that it will purchase $1.25 trillion in quantitative easing through the first quarter of next year and reiterated that interest rates will stay at almost zero for "an extended period." The most accurate Dollar forecasts have predicted that the U.S currency will continue to weaken, even after the Fed raises interest rates.

In terms of economic data, U.S existing home sales increased by more than forecast in October, to the highest level since February 2007. Purchases rose 10.1% to an annual rate of 6.1 million, from 5.54 million in September, spurred in part by a tax credit that lured first time buyers. Cheaper homes and stimulus, expanded by the government, has revived an ailing housing market that contributed to the worst economic slump since the Great Depression.

The Euro continued to gain fresh impetus against the Dollar, amid reports that Europe's services and manufacturing industries expanded at the fastest pace in two years in November, after a reviving global economic helped the region to emerge from the recession. A composite index based on a survey of purchasing managers' increased, after exports rose by the most in more than a year in September.


Data Released 24th November

GER 09:00 - Ifo Index (November)

EU 10:00 - Industrial Orders (September)

U.S 13:30 - Prelim GDP (Q3) - Deflator

U.S 14:00 - Case Shiller House Prices (September)

U.S 15:00 - Consumer Confidence (November)


written by Adam Solomon

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