GBPEUR/GBPUSD

Following on from last week, the Pound weakened slightly against the Dollar on Wednesday, but the UK currency made impressive gains versus the higher-yielding currencies like the Australian Dollar and South African Rand, as stocks slumped for a seventh consecutive day. Commodities also declined as global risk appetite waned and the MSCI World Index dropped 0.6%.

Sterling maintained its advance against the Euro for a third straight day, rising above 1.11 in London, after declining 1.9% following the GDP report earlier in the month. The FTSE 100 Index slid 1.5%, as reports from a number of financial institutions disappointed investors, and speculation increased that regulators may force banks to break up to strengthen balance sheets.

The FTSE 100 has retreated to a three-week low over the past week, as concerns increase that the seven month rally may have taken share prices too high relative to prospects for earnings growth. The gauge is still up 46% from this year's low on March 3rd and the global decline in risk appetite has encouraged investors to seek the security of safe haven assets in favour of low cost loans in Japan.

Copper dropped for a third straight day, while oil and gold prices also declined. Peter Frank, a currency strategist at Societe Generale SA, said that "we've had a bit of risk aversion in equity markets. The Pound isn't looking as if it could outperform the Dollar or the Yen in a risk averse situation." The Pound fell 0.2% against the Dollar to $1.6330 in London.

The increase in risk aversion helped Sterling appreciate over 2% against the Australian Dollar to 1.8220 and almost 3% in value versus the South African Rand. Sean Maloney, a fixed-income strategist at Nomura International Plc in London, said that "we've had a move upwards in all the markets and perhaps we're taking a bit of stock ahead of the supply we've got coming up in the five-year auction in the U.S."

The Bank of England's Monetary Policy Committee will decide on November 5th whether to extend the £175 billion bond purchasing plan, as the UK economy languishes in the worst recession on record. Frank at Societe Generale SA, said "that really is the key to whether the Pound is going to rally or not. The leading indicators are beginning to turn up."

Governments and Central Banks around the world are preparing to remove stimulus measures, after spending a total of $12 trillion, by International Monetary Fund estimates, to drag the global economy out of recession. Separately, the Land Registry said on its website last week that UK house prices rose 0.9% in September.

The Pound has risen sharply against the Euro over the past week and it will be interesting to gauge whether the UK currency can sustain this momentum going into this week. The rate announcement on November 5th is shaping up to be hugely significant in determining Sterling sentiment over the coming months, Euro and Dollar buyers may wish take advantage of the current rate or at least place a stop order.

The Pound rallied strongly against the U.S Dollar on Thursday, reaching a high of $1.6600 in London, while the UK currency also rose for a fourth straight day versus the Euro, briefly touching upon 1.1200. A report from the Bank of England showed that UK mortgage approvals increased more than initial estimates in September.

Banks and lenders granted 56,125 home loans, compared with 52,970 in August, as approvals climbed to the highest level in 18 months and added to signs that the housing market is stabilising. Bank of England policy makers will decide on Thursday whether to expand the £175 billion asset-purchase program of buying government debt to bolster the economy.

The third quarter GDP figures showed that the UK economy remains entrenched in the worst recession on record, after contracting for six consecutive quarters and economists have warned that the housing revival may come under scrutiny if job losses mount. James Knightly, an economist at ING Financial Markets, said "it will be a very tight decision for the Bank of England. The fact that gross domestic product is still negative will make it pretty difficult for them to do anything other than expand quantitative easing."

The Pound has rallied furiously against the majors in spite of the GDP numbers last week, amid speculation that the third quarter growth figures will be revised higher. The Pound extended gains made against the Dollar and traded above $1.65, after the opening of the U.S trading session. Recent reports have indicated that housing sector is recovering, after falling as much as a fifth from their peak in 2007.

Former Bank of England policy maker David Blanchflower said on October 26th that house prices may fall next year, leaving as many as 3 million people with homes worth less than the mortgages used to buy them. Monthly mortgage approvals are still only half what they were in September 2007, prior to when the credit crisis began.

Consumer spending may also be slow to recover as Britons choose to reduce their 1.46 trillion of debts built up during a decade long economic boom. Spending, which accounts for roughly two thirds of the economy, declined in September, while consumer credit also fell for a third straight month. The data released last week suggests that the Bank of England's efforts to unlock credit markets may be beginning to work.

Economists are divided over whether the Monetary Policy Committee should expand its bond-purchasing program on November 5th, after the economy contracted 0.4% between July and September. The gain in Sterling yesterday propelled the UK currency to its first monthly advance versus the Dollar since July.

The Pound continued to make gains against the Dollar towards the end of last week, as data released in the U.S showed that the economy returned to growth in the third quarter. U.S gross domestic product expanded 3.5% from July to September, the first expansion in more than a year, and surpassed the 3.2% forecast. Henrik Gullberg, a strategist at Deutsche Bank AG, said that "if we get strong data, be that in the UK or globally, it's a good thing for Sterling."

The UK currency was also poised to break three consecutive months of declines versus the Euro, even after last week's GDP report from the Office of National Statistics. The Pound advanced 0.5% against the Euro on Thursday and may encounter strong resistance between 1.1200-1.1270. Gullberg also said yesterday that "the market overreacted to the weak GDP numbers in the UK, What we have seen since is the market has moderated its bearish opinion."

The Pound lost some ground against the higher-yielding currencies, as the stronger-than-expected U.S data helped encourage investors back to riskier assets. UK stocks advanced 0.4% in London, after the report reignited expectations that a seven month rally is justified by the earnings outlook. The focus will soon switch to the BoE rate announcement and it will be interesting to see whether the Pound can hold on to the recent gains made against both the Euro and the Dollar.

EUR/USD

The Dollar and the Japanese Yen declined against most of the 16 most actively traded currencies last week, after the U.S economy returned to growth in the third quarter and encouraged investors away from the so-called "safe haven" assets. The U.S currency dropped against the Euro for the first time in five days, as stocks and commodities rallied worldwide.

Michael Woolfolk, a senior currency strategist at New York Mellon Corp, said "risk is back on. It should be positive for the stock market and negative for the Dollar." The Dollar declined 0.6% against the Euro in New York, despite comments from European Central Bank member Axel Weber, that the Bank may start to withdraw its emergency stimulus measures next year.

U.S policy makers will now focus on whether the recovery, supported by Federal assistance to the housing and auto industries, can be sustained into 2010 and revive the labour market. The record $1.4 trillion budget deficit limits President Obama's options more emergency stimulus, while Fed officials try to convince investors that the Central Bank will exit emergency programs.

The Dollar gained the most against the Euro in six months on Friday, amid concerns that the global economic recovery may stall. Central Banks are expected to scale down fiscal stimulus measures, reducing demand for higher-yielding assets funded by the Dollar. Michael Hart, a currency strategist at Citigroup Global Markets, said "there's this increasing recognition that much of the recovery we've seen so far was due to the temporary boost from various government programs".

The German retail sales index recorded a further decline for September, following a revised 1.8% fall the prevuious month. Risk appetite also faded on Friday and the Dollar strengthened back towards $1.4710 against the Euro. The series of interest rate decisions will be very significant market drivers this week and in particular, there will be further speculation over a potential change in language by the Federal Reserve.

Data Released 1st November

U.K 09:28 CIPS Manufacturing PMI (October)

U.S 15:00 Construction Spending (September)

U.S 15:00 ISM Manufacturing (October)

U.S 15:00 Pending Home Sales (September)

written by Adam Solomon

Labels: daily-insight