GBPEUR/GBPUSD

The Pound rallied against the U.S Dollar yesterday, climbing by the most in more than a week, after a report from the Office of National Statistics showed that UK gross domestic product contracted by less than previous estimates in the third quarter. GDP fell 0.3% from the previous three months, compared with a prior measurement of 0.4%, as slumps in manufacturing and services eased.

The modest upward revision in UK economic growth provides some optimism that the longest recession on record is coming to an end. The Prime Minister Gordon Brown has reiterated his desire to keep emergency stimulus measures in place to avoid "chocking the recovery", as the general elections looms largely on the horizon.

The government is fighting the worst unemployment rate in 14-years and the resilience in consumer spending is unlikely to last, which could severely undermine the economic recovery. The Bank of England have maintained UK interest rates at the lowest level on record and expanded the quantitative easing program on three occasions since March.

The governor of the Central Bank Mervyn King made a statement to the Treasury Select Committee yesterday and reiterated that a weak Pound is helping towards sustaining the economic revival. King also maintained that additional stimulus measures have ensured Britain's escape from the recession but the recovery isn't "particularly strong."

Nick Kounis, chief economist at Frotis Bank Nederland NV, said that "over the coming quarters the economy will accelerate pretty sharply. In the third quarter the UK was one of the sick men of Europe but it's going to step up a few gears and will be one of the stronger performers in Europe next year."

Kounis makes an interesting point that the Pound and the UK economy in general will overtake the rest of Europe in 2010. However, the UK's recovery is likely to lag behind the rest of Europe and the U.S, which have both returned to growth, because speculation persists that the BoE's quantitative easing policy may be extended beyond £200 billion.

Geoffrey Yu, a currency strategist at UBS AG, said "as we didn't get a downside surprise the fourth quarter number will probably be strong. This removes the clouds of uncertainty over Sterling. I'm not saying we should pile in but the outlook is certainly brightening." The Pound dropped back towards Tuesday's low at 1.1050 against the Euro yesterday and the UK currency is establishing a trading range between 1.10 and 1.1270.

In stark contrast to Yu's comments, Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc, said that "sentiment toward the Pound is pretty poor and I expect it to weaken further. It looks as if we have the possibility of further quantitative easing from the Bank of England whereas all the sounds coming out of the European Central Bank are about whether they need to tighten."

Data released in Germany yesterday showed that economic growth accelerated in the third quarter, while the U.S economy expanded at a 2.8% annual rate. The Pound rose 0.9% against the Dollar yesterday, hitting a high of $1.6740 in London, after the upward revision in UK GDP sent the FTSE 100 Index 0.8% higher.

The increase in risk appetite wiped out yesterday's losses and the FTSE 100 has climbed 53% since the March 3rd low, as governments worldwide embarked on spending programs and cut borrowing costs to revive the world economy. Stocks also extended gains yesterday, after U.S initial jobless claims fell more than expected to the lowest level since September 2008.


EUR/USD

The Dollar declined towards the lowest level in 14-months versus the Dollar yesterday, as the Federal Reserve gave an indication that it will tolerate a weaker currency and encouraged investors to buy higher-yielding assets. Fed officials said on November 4th that interest rates will remain close to zero for an "extended period."

In terms of economic data, a regional survey on U.S consumer confidence showed that sentiment remained fragile in November for a second straight month. A weak labour market threatens to weigh on spending going into the festive period, while a separate report on U.S new home sales showed that purchases rebounded more than anticipated in November.

Consumer spending accounts for roughly 70% of the U.S economy and may be unpredictable through the first quarter of 2010 with a jobless rate that is expected to remain above 10% through to the middle of next year. The Dollar may continue to weaken against the Euro in the short-term and a break towards $1.5250 may signal a sustained upward move.


Data Released 26th November

U.K 11:00 CBI Distributive Trades Survey (November)

EU 09:00 M3 / 3 Mth Moving Average (October)


written by Adam Solomon

Labels: daily-insight