The Pound rallies to the highest level this year against the Dollar, as oil prices hit an eight month high
GBPEUR/GBPUSD
The Pound found support close to $1.6400 against the Dollar yesterday and pushed higher throughout the course of the day, testing levels near $1.66 in New York. The UK currency also rallied above 1.1800 versus the Euro overnight and recorded a fresh yearly high against the U.S Dollar, as global risk appetite continued to improve.
The Nationwide Building Society reported that UK house prices rose for a second consecutive month in June, which helped boost underlying sentiment, adding to signs that the worst of the property slump is over. The average cost of a home in the UK and Wales climbed 0.9% to £156,442, after rising 1.13% in May, despite forecasts of a 0.5% drop.
From a year earlier, house prices fell 9.3%, the smallest annual drop in July 2008, while the Pound also rallied strongly following reports that UK consumer confidence increased to the highest level in 14-months in June. Sentiment has improved as shoppers became more optimistic that the recession is past its worst, despite rising unemployment.
An index of sentiment rose 2 points to a reading of minus 25, the strongest result since April 2008 and the Pound subsequently smashed through the previous high of the year versus the U.S Dollar, rising to a high of $1.6740 overnight. Unemployment claims rose less than expected in May, and business surveys have indicated that the economic slump is starting to ease.
Bank of England officials believe that the credit squeeze threatens to delay a recovery and economic data released yesterday showed that net mortgage lending rose at the slowest pace since records began in 1993. The subdued increase of £0.3 billion for May, followed a £0.9 billion increase the previous month.
There was a modest recovery in mortgage approvals for the month, but underlying weakness in lending will cause significant concerns over the economy and the Organisation for Economic Cooperation and Development warned that further action was required to help strengthen the banking sector. Although the immediate Sterling reaction was limited, the data will pose underlying risks to the Pound, especially if global risk appetite falters.
Confidence is still firm this morning, which has enabled the Pound to push higher against the majority of the 16-most actively traded currencies and the UK currency has broken through key resistance levels versus the U.S Dollar. Rachael Joy, an analyst at Gfk, said in a statement that "confidence still remains fragile as uncertainty about the strength of any recovery and an increase in unemployment all mean that consumers remain wary."
Four out of five indexes used to compile the confidence report rose on the month, including measures reviewing and predicting personal finances and the general economic situation. The only decline was on the gauge showing the climate for major purchases, which fell four points to minus 26. Claims for jobless benefits rose in May by 39,300, a third less than economists' had predicted.
The Bank of England kept the key interest rate unchanged at a record low of 0.5% this month and reiterated its program to stoke economic growth by purchasing £125 billion of bonds with newly created money. The Deputy governor of the BoE Charles Bean told lawmakers last week that the worst of the recession may be past and consumer spending has been "more resilient than one might have expected."
At the same time, the Governor Mervyn King said that he feels "more uncertain now than ever" on the strength of the economic recovery as officials work to resolve the banking system. King affirmed forecasts that the economy won't return to growth on an annual basis until the second half of 2010. The Pound also found underlying support yesterday, as UK stocks gained for the first time in three days.
EUR/USD
The Euro was initially weaker in Asian trading on Monday, but found solid support just below the $1.4000 level against the U.S currency and pushed back to the $1.41 region during the day. Risk appetite gradually improved through the day, which helped lessen dollar demand and made it easier for the Euro to push higher.
There was also a recovery in the Euro-zone business and consumer confidence indicators, underpinning confidence in the Euro-zone recovery prospects. Immediate fears surrounding the threat of the Baltic State currency devaluations also provided some underlying relief to the Euro and investors will monitor any G8 comments on currencies closely ahead of their summit next week.
There were no major U.S data releases yesterday to help guide financial markets but the Chicago PMI index and consumer confidence data will be watched closely today for further evidence on economic trends. The Dollar is liable to weaken if there is a sharp recovery in these two indices as risk appetite would improve.
The Pound rallies against the majors amid an improvement in global risk appetite
GBPEUR/GBPUSD
Following on from last week, the Pound rallied against the Dollar on Friday, finding support around $1.6400 before improving steadily through the course of the day to challenge resistance levels above $1.6500. The UK currency also rose back towards 1.1750 versus the Euro, as improved economic data in the U.S spurred demand for riskier assets such as stocks priced in Sterling.
The FTSE 100 Index swung between gains and losses throughout the course of last week, as global risk appetite deteriorated and investors returned to the relative security of dollar denominated assets. The benchmark FTSE 100 Index declined 0.6% to 4,252.57 in London and the stock market has decreased 5.6% from June 1st, amid speculation that share prices have outpaced the outlook for earnings growth after the gauge reached 30.7 times its companies earnings.
In the FOMC statement on Wednesday, policy makers doused speculation that it will pump more money into the economy to hold down interest rates. The Pound was able to avoid a test of key technical support in the $1.6200 region and rallied back towards $1.6400 in New York on Thursday, as volatile trading conditions persisted. The UK currency also found key support under 1.1670 against the Euro, as there were no economic factors or official comments to guide the Pound during the course of the day.
The UK currency also fell against the Swiss Franc and the Australian Dollar, as the FTSE 100 index slipped 1.6% in London, the most in three days. The Pound was also unsettled to some extent by concerns surrounding fiscal debt, amid comments from the Bank of England governor Mervyn King on Wednesday, but the impact faded during U.S trading as equity markets rallied.
There will be a much greater chance of a change in sentiment if there is a sustained deterioration in global risk appetite. Confidence held relatively firm in early Europe on Friday and this helped Sterling hold near the $1.6400 level against the Dollar. King said on Wednesday that the U.K's path out of recession may be a "long, hard slog".
Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd, said that "the market's positioned long sterling and lower equities provide a good excuse to take some profit. The Pound hasn't performed since Mervyn King spoke on Wednesday." Kings comments have clearly weighed on Sterling sentiment, while the Organisation for Economic Cooperation and Development said that the UK gross domestic product will drop 4.3% this year.
The Pound snapped a two-day decline versus the Dollar on Friday, as the FTSE 100 Index of shares rebounded as much as 1.3%, before erasing earlier gains. The FTSE 350 Banks Index rose as much as 1.7% and the Pound's correlation with the banking gauge has been 79% or higher this year. Consumer spending in the U.S climbed in May for the first time in three months.
Ian Stannard, a foreign-exchange strategist at BNP Paribas SA, said "we have risk appetite re-emerging, which is sterling positive. There's still quite a lot of negative sentiment toward the fiscal and debt position of the UK, which has been highlighted this week by policy makers, which has kept sterling depressed on the week."
The Pound has risen 13% against the Dollar this year, and 11% versus the Euro, as the global financial system shows tentative signs of stabilising. The Pound weakened to a record low of 1.02 versus the Euro on December 30th and reached a 23-year low of $1.3505 against the Dollar on January 23rd. The UK currency fell earlier in the week after Bank of England chief economist Spencer Dale said a weaker currency is making UK assets more attractive to foreign investors.
The Bank of England said on Friday that financial institutions' losses from the crisis have left them vulnerable to another wave of shocks, including the risk that the economy will remain mired in a recession. "Given their leverage and funding positions, banks in the UK and internationally will remain sensitive to further stocks for some time", the central bank said in a statement.
UK house prices fell for a thirteenth consecutive month in May, as the average cost of a home in England and Wales fell 0.2% from April to £152,497. BoE policy maker Kate Barker said last week that the property market was still "some way away from normal" and the bank said that financial institutions are vulnerable to more shocks.
Despite the Banks warning that the banking sector will remain fragile and vunerable to external shocks, the Pound managed to avoid further selling pressure. The key factor is that overall risk appetite remained firm which underpinned the Pound and lessened the impact of bank warnings. Simarly, fears over the budget situation have also lost some of their impact for the timebeing.
EUR/USD
The Dollar fell against most of the major currencies on Friday, after China repeated its call for a supernational currency "delinked" from sovereign nations. The U.S currency headed towards its biggest weekly loss against the Euro in four weeks, after the People's Bank of China said the International Monetary Fund should manage more of members' foreign exchange reserves.
The Dollar was unable to gain any support during Friday and dopped significantly lower in European trading. There was also an implicit attack on the U.S economic policies, which fuelled speculation over underlying reserve diversification. The comments from China renewed market fears over the underlying threat of a central bank diversification away from the U.S currency and this is an importnant element in undermining dollar confidence during the day.
The Euro challenged levels above $1.4100 against the Dollar on Friday, before consolidationg around $1.4065 by the close of trading. The preliminary German consumer prices data was stronger than expected with a 0.4% rally and this will tend to dampen expectations of a more aggressive ECB stance on monetary policy.
Data Released 29th June
UK 09:30 Consumer Credit / Mortgage Applications (May)
The Pound declines against the majors, as stocks drop by the most this week
GBPEUR/GBPUSD
The Pound dropped against the Dollar and the Euro yesterday, as global stocks markets declined for the third day this week and the Bank of England governor Mervyn King said that the UK economic recovery will be slow. The UK currency was unable to rally above the $1.6500 level on Thursday and then weakened steadily through the course of the day with lows around 1.6230.
UK stocks declined for a third day this week, led by banking shares, as the Federal Reserve disappointed investors by refraining from increasing bond purchases. Bank of Ireland Plc slumped 7% in Dublin trading, as the International Monetary Fund warned that the nation's lenders face losses of as much as $49 billion through 2010.
The benchmark FTSE 100 Index declined 0.6% to 4,252.57 in London and the stock market has decreased 5.6% from June 1st, amid speculation that share prices have outpaced the outlook for earnings growth after the gauge reached 30.7 times its companies earnings. In the FOMC statement on Wednesday, policy makers doused speculation that it will pump more money into the economy to hold down interest rates.
The Pound was able to avoid a test of key technical support in the $1.6200 region and rallied back towards $1.6400 in New York, as volatile trading conditions persisted. The UK currency also found key support under 1.1670 against the Euro, as there were no economic factors or official comments to guide the Pound during the course of the day.
The UK currency also fell against the Swiss Franc and the Australian Dollar, as the FTSE 100 index slipped 1.6% in London, the most in three days. The Pound was also unsettled to some extent by concerns surrounding fiscal debt, amid comments from the Bank of England governor Mervyn King on Wednesday, but the impact faded during U.S trading as equity markets rallied.
There will be a much greater chance of a change in sentiment if there is a sustained deterioration in global risk appetite. Confidence held relatively firm in early Europe on Friday and this helped Sterling hold near the $1.6400 level against the Dollar. King said on Wednesday that the U.K's path out of recession may be a "long, hard slog".
Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd, said that "the market's positioned long sterling and lower equities provide a good excuse to take some profit. The Pound hasn't performed since Mervyn King spoke on Wednesday." Kings comments have clearly weighed on Sterling sentiment, while the Organisation for Economic Cooperation and Development said that the UK gross domestic product will drop 4.3% this year.
EUR/USD
The Dollar retained a firm tone in Europe trading on Thursday and tested levels just below $1.3900 in New York, as Euro sentiment was generally weaker, although moves were limited with the Dollar still finding it difficult to gain strong support. Fears over underlying reserve diversification away from the Dollar will continue to undermine sentiment, while expectations persist that interest rates will remain low.
U.S initial jobless claims rose to 627,000 in the latest week from a revised 612,000 previously, while continuing claims rose to near 6.74 million. The unemployment data has been showing signs of improvement and the latest release will cause some fresh anxiety over the labour market situation. Elsewhere, U.S gross domestic product in the first quarter was revised slightly to show a modest improvement.
The Pound strengthens against the Dollar but any gains may be short-lived
The Pound strengthened against the Euro yesterday, bouncing back from a low of $1.1630 on Tuesday, after banking stocks rallied and the Organisation for Economic Cooperation and Development raised its forecast for UK economic growth next year. The Pound also gained against the lower-yielding currencies, including the Dollar, as we touched $1.66 prior to the FOMC rate announcement last night.
A report from the Confederation of British Industry showed that UK retail sales recorded a figure of -17 for June, unchanged from the previous month, and the Pound subsequently rallied, as retailers expected a further decline for July. The OECD forecasts were mixed as the 2009 GDP was revised to lower to show an even sharper contraction, although there was an upgrade for the 2010 figure.
According to the OECD, the UK economy will recover "mildly" next year with a previous forecast of a 0.2% contraction. Gross domestic product will drop 4.3% this year, against a March forecast of 3.7%. The Pound's advance was tempered in New York, after comments from Bank of England officials again had a significant market impact.
The Governor of the BoE Mervyn King and other committee members were very cautious over the economic outlook with King repeating comments that the recovery in the economy was liable to be protracted, while there was a very high degree of uncertainty over the outlook. King again warned over the fiscal position and called for the government to tighten policy if there was any sign of an economic recovery.
In his statement, King said that "there has to be a risk that it will be long, hard slog. I feel more uncertain now than ever. This is not the pattern of a recession coming into recovery that we've seen since the 1930s. Having an open mind and not pretending to foresee the future when its so uncertain is important."
The Pound also found buying support as the FTSE 350 Banks Index rose 1.2% in London, while UK stocks also rose led by a rebound in mining companies. The benchmark FTSE 100 Index also added 1.2%, rising for the first time in three days, as global risk appetite improved. Gavin Friend, a markets strategist at National Australia Bank, said that "if the banking sector is outperforming even while the main index is not, then that can help the Pound."
The Pound rallied 0.8% against the Euro yesterday, rising to a high of 1.1790, while the UK currency stood predominantly unchanged versus the Dollar at $1.6452, after earlier rising as much as 0.9% to a high of $1.6602. The FTSE 350 Banks Index climbed after dropping 3.5% this week. The correlation between the Pound's performance and the banks measures is greater than 79% and that is the reason that any short-term momentum in Sterling is continually under threat.
The outlook, together with stresses between the Central Bank and the government will tend to undermine sentiment in Sterling to some extent. The Pound retreated back towards $1.6400 against the Dollar this morning, as the benign FOMC rate announcement and tentative performance in global stocks encouraged investors back to the Dollar.
The Pound extended it advance against the Euro yesterday, after the ECB said that it will lend banks €442 billion for 12-months, as it steps up efforts to unfreeze credit markets. However, the UK currency has fallen back towards 1.1700 this morning and Euro buyers may wish to consider a stop order at 1.16 to protect against a sustained downward move.
In yesterday's market update, we warned of the inherent downside risks on Sterling/Dollar following the FOMC rate announcement, especially if global risk appetite deteriorates aswell. The Pound looks poised to revisit the trend support at $1.6200 over the coming days and Dollar buyers would be well placed to use a stop order just under this level to protect against a move back towards $1.6000.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound rises above $1.6500 against the Dollar, ahead of the FOMC rate announcement
The Pound resumed its downward momentum against the Dollar yesterday and again tested support levels close to $1.6200 and was able to find strong buying support once more near this important technical level, with gains to $1.6500 in New York as the Dollar stumbled. The UK currency declined for a second consecutive day against the Euro, after the Bank of England's chief economist Spencer Dale said that a weaker Pound is making UK assets more attractive to foreign investors.
Daragh Maher, deputy head of global foreign exchange strategy at Carlyon, said that "the BoE's comments have been used as an excuse to sell Sterling. The market has been looking for an argument to sell Sterling and Dale's comments fit the bill." The Pound had weakened 1.3% against the Euro, falling through significant support at 1.1764, to a low of 1.1630.
Sterling also registered losses versus the Japanese Yen and Swiss Franc, as Dale also said that the exchange rate was a "key channel" that could be utilised to revive economic growth. UK stocks dropped 0.1%, erasing earlier gains, as the FTSE 100 Index of shares fell to 4,230.02 in London, having swung between gains and losses at least nine times during the course of the day.
The tentative swings in risk sentiment will tend to undermine confidence in the Pound and the higher-yielding currencies, encouraging investors to seek the relative security of safe haven assets. The FTSE has rallied 20% from this year's low on March 3rd and is currently trading at 30.1 times its companies' earnings, compared with 17 times profit in the week the rally began in March.
The World Bank said on Monday that the global economy is expected to resume growth next year with a 2% expansion, lower than the 2.3% forecast previously. However, the Confederation of British Industry are slightly more optimistic on the prospects for a recovery in the UK economy and that will continue to bolster the Pound, despite a heavy increase in unemployment.
The Pound came under renewed selling pressure on Monday, after the Rightmove Plc, the UK's largest property website, said that the average cost of a home dipped 0.4% in June, recording the first decline in five months. The UK currency has climbed 3.2% against the Dollar over the past month and looks poised to rally towards the high above $1.66, ahead of the FOMC rate announcement this evening.
The UK economy shrank 1.9% in the first quarter and the ongoing recession may see gross domestic product contract 4.5% in 2009, the most since 1931, according to forecasts by the Centre for Economics and Business Research. The Chancellor Alistair Darling said on April 22nd that the budget deficit this year will reach £175 billion, or 12.4% of GDP, the highest proportion among the Group of 20 nations.
Standard & Poor's also cut the outlook on UK sovereign debt to "negative" from "stable" on May 21st and there are a number of negative factors that could potentially curtail the Pound's momentum. In particular, Dollar buyers would be well placed to take advantage of today's rate, in light of the FOMC interest rate announcement this evening because we could see a move back towards $1.6200 if stocks continue to deteriorate.
EUR/USD
The Euro found good support around $1.3825 against the Dollar yesterday and strengthened impressively through the course of the day, as all eyes focus on the U.S interest rate announcement tonight. The single currency actually recorded the largest advance in six weeks, to a high above $1.41 in New York, after a host of European economic reports raised optimism on the prospects for a recovery.
The PMI manufacturing indices were firmer than expected with the flash index rising to a reading of 42.4, from 40.7 the previous month. The services sector index edged moderately lower, despite expectation of a measured increase, which will be of some concern with fears that improvements in the sector are being driven by inventory adjustment.
The European economy is showing real signs of stabilisation, after shrinking at the fastest pace in at least 15-years in the first quarter. German and French business confidence rose for a third consecutive month in June and the ECB president Jean-Claude Trichet said that the worst of the recession may be over, after policy makers cut rates to a record low and embarked on a policy of buying covered bonds.
The comments from a number of ECB officials were generally supportive of the Euro, with governing council member and Bundesbank President Axel Weber stating that the bank had no more room to cut interest rates. The Central Bank's one-year refinancing operation will be watched closely on Wednesday and strong demand for funds could undermine the Euro.
The Dollar has declined against the majority of the 16-most actively traded currencies on speculation that the Federal Reserve will temper expectations for an interest rate increase this year, in an attempt to lower borrowing costs. Traders are speculating that that the FOMC will keep the benchmark rate close to zero for the remainder of the year to support a return to economic growth.
The Pound declined against the majors, as global stocks declined amid falling oil prices
GBPEUR/GBPUSD
The Pound declined against the Dollar yesterday, falling back towards the key support level around $1.6200, as a report from Rightmove Plc showed that UK home sellers lowered their asking prices in June for the first time in five months. Stock market losses sapped demand for riskier assets priced in Sterling and that eroded confidence in the Pound throughout the course of the day.
According to the report, the average cost of a home in Britain dropped 0.4% to £226,436 from May, when it rose by 2.4%, as banks scaled back lending and demanded bigger deposits on purchases. In a separate report from the Centre for Economics and Business Research, services companies will lose more than 300,000 jobs within the next five years, adding to the already escalating unemployment problem.
The Bank of England have recently said that the UK housing market is showing tentative signs of stabilising. However, the governor Mervyn King said last week that tighter lending conditions may hamper an economic recovery from the worst recession in a generation. Unemployment, which rose to the highest level since 1996 in the quarter through April, may also hamper a rebound in property values.
Miles Shipside, commercial director at Rightmove Plc, said in an interview yesterday that "we're very much bumping along the bottom. Sellers are having to reduce prices to where they're getting interest, with the pickup in sales activity, there's a narrowing gap between asking prices and what's actually being achieved."
UK house prices fell 5.5% on the year, as mortgage lenders raise the cost of fixed-rate loans and require bigger deposits. The Nationwide Building Society and Lloyds Banking Group Plc this month both increased the cost of their fixed-rate home loans, after a jump in UK swap rates, used by banks as a benchmark for mortgage costs.
The drop in house prices this month follows separate reports last week that showed UK retail sales unexpectedly fell in May, while unemployment increased to the highest level in 12-years. The Pound dropped in light of the damaging economic data and also registered losses, after manufacturers' export orders declined to lowest level in a decade, reflect the lack of demand from overseas.
Nevertheless, there are still signs of a pick-up in the economy as more than half of UK companies said that the country has reached the bottom of the economic cycle and business confidence rose to the highest level since 2008. Inflation also slowed less than economists' forecasts in May, while both manufacturing and service industries also improved.
The Pound also weakened against the Japanese Yen and Swiss Franc, as a degree of risk aversion stalked the market. However, the UK currency rallied to the highest level against the Euro this year in London, touching a high of 1.1900, before retracing back towards the trend support at 1.1764 this morning.
UK stocks also dropped for the first time in three days yesterday, to the lowest level since April, as a retreat in crude oil prices weighed on producers. Concerns also grew that the overwhelming rally since March has outpaced expectations for the earnings and the economy. The benchmark FTSE 100 Index of UK shares slid 2.6% on the day, while the MSCI world index of equities also declined.
Daragh Maher, deputy head of global foreign-exchange strategy at Calyon, said that "equity markets have been a bit softer and we have been a modest safe haven bid back. This is favouring the Dollar over Sterling." The Pound has risen 2.6% against the Dollar over the past month but the UK currency dropped to a low of $1.6250 overnight, after briefly touching a high of $1.6500 yesterday.
Government bonds rose around the globe, while stocks fell, as the World Bank said that the global economy will contract 2.9% this year, up from a previous forecast of 1.7%. The Confederation of British Industry said earlier this month that the UK economy will shrink 0.3% in the second quarter and 0.1% in the third.
The Pound's performance is almost solely down to the aggressive swings in risk appetite and we can expect to see further downside momentum, particularly against the lower-yielding currencies, if stock market losses worsen. Euro and Dollar buyers may wish to take advantage of the current rate or at least place a stop order in the market to protect against further losses. A good level for stop on Sterling/Dollar would be just under the pivotal $1.6200 level and 1.1600 versus the Euro.
EUR/USD
The Euro dipped to lows around $1.3825 against the Dollar yesterday, as commodity prices continued to decline before a modest stabilisation in New York. The German Ifo sentiment index rose to a reading of 85.9 in June, compared with 84.2 the previous month, maintaining the improvement over the past few months.
Companies were still largely pessimistic over current economic conditions and Ifo officials did not describe the modest improvement as a defining turning point for the economy. That cautious tone of the comment tended to stifle any resurrection in risk appetite and maintained doubts over the prospects for an economic recovery in the Euro-zone.
The Dollar was supported as investors returned to the relative security of safe haven assets, as the World Bank released its latest forecasts for the global economy and was generally downbeat on the chances of a recovery. The U.S currency may continue to may gains in an environment of risk aversion but Wednesday's Federal Reserve interest rate announcement will be watched closely, amid high uncertainty over the Fed's guidance on the economy.
According to technical analysts at Citigroup Inc, the Euro will probably extend its decline against the Dollar, as it approaches a major areas of support. The single currency dropped by the most in a week yesterday and the Euro is forming a "head and shoulders" formation, indicating further depreciation if we break through level between $1.3793 and $1.3722.
The Pound rallies against the majors, amid speculation that the Britain will recover this year
GBPEUR/GBPUSD
Following on from last week, the Pound recorded its longest run of weekly advances against the Euro in over four years, bolstered by gains on Thursday, after the Bank of England Governor Mervyn King said that the UK recession may be easing. The UK currency found support close to the $1.6300 level against the Dollar on Friday and rose sharply higher, resisting a further test of support around 1.6200.
As the Dollar came under renewed selling pressure, the Pound pushed to a high above $1.6550, while the UK currency also strengthened towards the 2009 highs near 1.1860 versus the Euro. The Pound has continued to gain support from a relatively firm tone in risk appetite, despite the political unrest in Iran, and a lack of confidence in the major currency alternatives.
There was no significant domestic developments on Friday with confidence in the UK economy still providing underlying support for Sterling, especially with the fundamental lack of confidence in the Euro-zone. The Pound rallied from close to the lowest level in a week against the Dollar, after Mervyn King said in a newspaper interview that policy makers are seeing evidence the economy's contraction is beginning to "flatten off".
Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd, said that "King was more upbeat that he has been previously, and that has come as a surprise to the market. It's a major leap of faith for him. The market is taking it seriously and has gone and bought Sterling." The Pound rose 0.5% against the Euro to a high of 1.1865, to record the longest stretch of weekly gains since April 2005.
King also said that the UK will "certainly come though" its worst recession in a generation and return to "an ordinary business cycle". The Bank of England said in London on June 17th that "the risk of a continued sharp contraction" has "receded somewhat". Unemployment rose in May by less than economists forecast but retail sales unexpectedly declined, recording a 0.6% loss.
In addition, the FTSE 100 Index rose by the most in almost three weeks, boosting demand for the Pound and higher-yielding assets. UK stocks climbed, trimming the first weekly loss in five weeks, as a gauge of mining shares rebounded from the longest losing streak in six months and homebuilders rallied. The benchmark FTSE 100 index climbed 1.5% on Friday, paring the loss for the week to 2.2%.
The Pound has advanced 3.8% against the Euro and 6.7% versus the Dollar over the past month, as evidence builds that the UK economy is through the worst of the recession and investors are tempted back to UK assets. Taylor Wimpey Plc, Britain's largest homebuilder, said on Thursday that its domestic order book surged 73% from the end of last year, as buyers returned to the housing market.
European Union leaders are seeing signs of a "sustainable economic recovery" and ruled out further stimulus measures. The UK economy shrank 1.9% in the first quarter, and the International Monetary Fund still expects gross domestic product to contract by 4.5% this year, the most since 1931.
Nevertheless, the Pound is performing well against almost all of the 16-most actively traded currencies this morning, as a report from Rightmove Plc showed that UK home sellers lowered asking prices in June for the fist time in five months.
EUR/USD
The Euro found support below $1.3900 against the Dollar on Friday and generally maintained a slightly firmer tone throughout the course of the day, even though it struggled to sustain its early momentum. There were no significant data releases to guide the markets during the day but risk appetite was firmer, which tended to erode Dollar support.
There were also warnings from Standard & Poor's that California's debt credit rating would be downgraded, which undermined Dollar sentiment. The Euro advanced towards the pivotal $1.4000 level in New York, amid caution ahead of the Federal Reserve interest rate decision on Wednesday. The focus in the Euro-zone will be the German IFO sentiment index this morning and the most likely outcome is that the index will rise further.
European Central Bank Governing Council member Ewald Nowotny said that the bank is likely to keep interest rates steady at a record low for at least the remainder of the year. The ECB won't substantially alter its assessment of the economic outlook and "therefore I don't see a likelihood for rate changes" Nowotny said in an interview in Vienna of Friday.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound declines against the majors, after retail sales unexpectedly drop in May
GBPEUR/GBPUSD
The Pound dipped sharply lower against the majors yesterday, briefly falling under 1.1700 versus the Euro, while the UK currency also retested support at $1.62 against the U.S Dollar. Retail sales unexpectedly declined in May for the first time in three months and the Bank of England governor Mervyn King said that any economic recovery is likely to be "protracted", as banks ration loans.
The report from the Office of National Statistics showed that sales declined 0.6% from the previous month, despite expectations of a more positive 0.3% increase. Store sales also dropped 1.6% from a year earlier and the Pound subsequently declined against all of the 16 most actively traded currencies. Recent economic reports have indicated that the UK recovery from the worst recession since 1979 will be uneven, as unemployment continues to spiral.
Elsewhere, the latest monthly government borrowing data registered a record monthly deficit of £19.9 billion. The latest bank lending data was also weak as lending remained under pressure. The data released yesterday will certainly have some negative impact on the Pound, even if the immediate impact is measured.
The UK currency will also continue to be influenced strongly by swings in risk appetite and Euro and Dollar buyers should take advantage of the current rate, or at the very least consider using a stop order to protect against a sustained downward move.
While recent surveys on manufacturing and services improved, the Bank of England confirmed yesterday that the flow of loans to companies stayed close to the lowest level in nine-years in June. David Tinsley, an economist at National Australia Bank in London, said "today's retail sales have muddied the waters. We'd agree the growth outlook has improved. But analysis of the past recession suggests extreme caution on the pace of recovery."
The Pound dropped 1% against the Dollar yesterday, falling to a low of $1.6189, but recovered later in the session as global risk appetite improved. The UK currency also fell by about the same against the Euro but by the close of trading last night, the Pound had recovered to 1.1750. Over the course of the year, retail sales dropped 1.1%, the most since 1988.
The UK's economic recovery may be retrained due to the bank's unwillingness to free up lending conditions. New loans approved remained at weak levels amid "subdued demand" last month, while gross mortgage lending fell 2% in May from the previous month, according to the report from the Council of Mortgage Lenders.
In a statement to the Mansion House earlier this week, the BoE governor Mervyn King, said that "banks' ability to finance a sustained recovery remains impaired by low level of equity capital". In stark contrast, the Chancellor Alistair Darling maintained that he's "confidence there will be a sustained recovery", suggesting there are divisions emerging between the Bank of England and the Treasury.
The Pound bounced back later in the day, as UK stocks erased earlier losses, after manufacturing in the Philadelphia region contracted in June at the slowest pace in nine months. The benchmark FTSE 100 Index added 0.4% on the day, after falling as much as 0.9% in London. Vodafone Plc and Standard Chartered Plc led the gains.
According to a gauge of technical analysis, the Pound may drop to the lowest level in more than a week versus the Dollar, if it closes below its 20-day moving average. The UK currency may fall to $1.6000 against the Dollar, weakest level since June 9th, after sliding through the $1.6223 level yesterday. The Pound will fall to 1.6100 by year-end, amid concerns about the UK debt position.
EUR/USD
The Euro pushed higher against the Dollar in early trading yesterday, but continued to face tough resistance around $1.4000. The single currency edged weaker ahead of the opening in New York, although the ranges were relatively narrow with the Dollar unable to sustain its momentum, due to a rally in global stock markets.
The U.S Philadelphia Fed Index rose to a reading of -2.2 in June, from -22.6 the previous month, which was much stronger than initial forecasts and the highest reading for nine months.The tone of the report inspired confidence in financial markets and boosted confidence of an economic rebound, especially as the New York manufacturing index had registered a monthly fall.
Elsewhere, initial jobless claims edged slightly higher to 608,000 in the last week, from 605,000 previously, while there was a decline in continuing claims, which will boost confidence that the labour market will stabilise. Risk appetite improved following the U.S data and the Dollar weakened back towards $1.4000 by the close of trading last night.
The Pound declines against the majors, after unemployment rise to the highest level in 12-years and division emerge between the BoE and the Treasury
GBPEUR/GBPUSD
The Pound declined against the Euro yesterday, dropping by the most in almost two weeks versus the single currency, while Sterling also found good support around $1.62 against the U.S Dollar, as stocks retreated and risk aversion crept back into the market. The minutes from the Bank of England's last policy meeting also showed that policy makers voted unanimously to continue the pace of quantitative easing.
The UK currency initially made gains against the majors, as UK jobless claims rose by 39,300 in the latest monthly survey, after a revised 49,600 increase the previous month. The result was significantly better than expected, even though the unemployment total was at the highest level in 12-years. The BoE also said that the risk of a deeper slump has receded, providing yet more evidence that the economy is past its worst faze of the recession.
Claims for jobless benefits rose to 1.54 million in May, the smallest increase since July last year, and the report from the Office of National Statistics was expected to show that claims soared to 60,000 on the month. The Bank of England said separately that "the risk of a continued sharp contraction has receded somewhat"
There is mounting evidence that the UK economy is recovering from the worst recession since at least 1979, as manufacturing output rises for a second month in April and services expand for the first time in a year. However, the minutes from the Bank of England yesterday also stated that it's soon soon to assess whether the asset insurance program is working to bring the economy out its slump.
James Knightly, an economist at ING Financial Markets, said that "while the economy may see positive growth at some point later this year, the risk of a relapse is still high." That sentiment may undermine confidence in the Pound over the coming months, as the UK currency struggles to sustain it momentum above the yearly highs.
A broader measure of unemployment rose 232,000 to 2.26 million people out of work in the three months through April, the highest total since November 1996. The Confederation of British Industry expected unemployment to peak in the second quarter of 2010 at 2.02 million, a rate of 9.6%, which is a modest improvement on the 3.25 million predicted in April.
Signs of a tentitative recovery in the economy may provide a much-needed boost to Gordon Brown, as he attempts to bounce back from this month's leadership crisis. The UK prime minister has trailed in opinion polls for the majority of his time in office and has quashed a revolt in his own party, while rejecting opposition calls for an early election.
Brown now faces the daunting prospect of fighting the election, which must be held by June 2010, with a staggering 10% of people of employment age out of work for the first time since 1994. The jobless rate rose to 7.2% in the quarter through April and that will probably undermine consumer confidence and curtail the pace of retail sales.
Claimant count unemployment rose for a 15th consecutive month in May and to the highest level since July 1997, just after the Labour party came to power. Central Banks around the globe have started to discuss whether to end the emergency policies set up to fight the worldwide recession. U.S Federal Reserve officials are said to be considering whether to use next week's policy statement to suppress any speculation that they're prepared to raise interest rates this year.
Some economists, however, believe there are enough positive signs of a recovery for the Bank of England to begin scaling back quantitative easing measures. Former BoE policy maker DeAnne Julius said in an interview yesterday that "inflation will probably be a greater risk to the UK economy than deflation over the next few years."
Following the release of the minutes from this months policy meeting, UK stocks retreated as the FTSE 100 Index fell to its lowest level since May 5th, losing 1.2% in London. Jeremy Stretch, a senior currency strategist at Rabobank International, said that "stocks have been pummeled today as we shift towards a more risk-averse mentality and that's conspiring to hit Sterling. The Pound never does well in this sort of environment."
The Pound subsequently weakened 0.8% to a low of 1.1720 versus the Euro, after earlier sliding as much as 1.2%, recording its steepest intraday decline since June 4th. Stocks declined by the most in six weeks, as investors speculated that the three-month rally has outpaced the prospects for earnings growth.
According to Commerzbank AG, the Pound's gains against the Euro may stall as risk aversion increases, prompting investors to take profit on the UK currency's 4% rally over the past month. The Pound "appears vulnerable to profit taking" and yesterday jobless report and minutes of the last central bank meeting, "may finally shift the balance in favour of temporarily higher euro levels" against Sterling.
The Pound found strong support around $1.6200 against the Dollar and bounced higher in early trading this morning. Investors are likely to adopt a more cautious tone, amid evidence that there are divisions between the Bank of England and the Treasury over banking-sector regulation. This may also unsettle confidence in the Pound and therefore Euro and Dollar buyers would be well placed to take advantage of the current rate.
EUR/USD
The Euro found support above $1.3800 against the Dollar yesterday and rallied throughout the course of the day, as risk appetite tended to improve once again. The U.S currency was also unsettled by a Standard & Poor's downgrading of U.S bank credit ratings, with the Euro holding firm above $1.3900 this morning.
U.S consumer prices also rose by just 0.1% in May, slower than the 0.3% monthly increase expected, while the underlying rate was largely in line with initial forecasts. The weaker than expected headline increase and the largest annual decline since 1950 of 1.3% provided some support to risk appetite and helped curb demand for dollar denominated assets.
There was also reduced expectations that the Federal Reserve would consider an increase in I.S interest rates, which also undermined the appeal of the Dollar. The current account deficit was smaller than expected at $101.5 billion for the first quarter, compared with a revised $1.54.9 billion in the previous three months.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound advances against the majors, but caution ahead of the unemployment report
GBPEUR/GBPUSD
The Pound rallied from a one-week low against the U.S Dollar, rising to a high of $1.6480 in New York, while the UK currency also rose to yet another yearly high versus the Euro, after inflation slowed by less initial forecasts. Consumer prices rose 2.2% from a year earlier in May, after higher taxes and a weak Pound sustained price pressures within the economy.
The report from the Office of National Statistics was slightly higher than expected, compared with 2.3% in April, and prices increased 0.6% from the previous month. The result boosted speculation that the Bank of England will need to raise interest rates at some point this year and the Pound subsequently rallied against almost all of the 16-most actively traded currencies.
Inflation has been a primary concern for policy makers, who have reduced interest rates to a record low and embarked on a period of quantitative easing, spending £125 billion in newly created money in UK debt markets to prevent deflation from taking hold. The Bank of England still expect inflation to slow further over the coming months but will be aware of escalating price pressure within the economy.
Nick Kounis, chief European economist at Fortis Bank, said that "inflation has been coming down at a much slow pace than expected. Even though we're seeing signs the economy is moving more quickly out of the recession, the bank will remain cautious." The Pound rose as much as 0.7% against the Dollar after the release of the data.
Inflation has now stayed above the Bank of England's 2% target for the past 20 months and the monthly increase in prices was twice as much as the 0.3% anticipated. Higher taxes on alcohol and tobacco, implemented by the Chancellor Alistair Darling in his April budget, has helped push up inflation. Officials also suggested that import costs have risen on some goods such as cars because of the Pound's weakness.
The retail price index used by wage negotiators as a measure of the cost of living, fell 1.1% from a year earlier in May, less than the 1.2% reported in April. The Bank of England is in its fourth month of pumping money into the economy through quantitative easing measures, in order to keep inflation at its 2% target.
Julian Callow, chief European economist at Barclays Capital in London, said that "the Bank of England's strategy of quantitative easing is so far proving to be really quite successful in avoiding the risk of deflation. The low point in inflation will be around September, when it might go to around 1%. That's unlike the Euro-are, where inflation is poised to move into negative territory."
The Pound declined more than 25% against the Dollar and the Euro last year but has recovered more than 11% against both currencies since the start of 2009, amid mounting evidence that the economy is recovering from the worst recession in a generation. The downturn in growth has diminished support Gordon Brown's government, as the Labour Party had its worst ever result in the local elections.
The Pound initially declined at the start of the week, after the Confederation of British Industry said that the UK economy won't resume until 2010. BoE policy maker Fisher also said last week that Britain shouldn't be complacent that the worst of the crisis is over. However, there is evidence that the slump may be moderating, as UK service industries showed expansion in May for the first time in 12-months, while manufacturing expanded in April following a year-long slump in output.
The Pound also advanced against the Swiss Franc and Japanese Yen yesterday, after UK stocks also advanced for the first time in three days, led by Tesco Plc and BT Group Plc. The benchmark FTSE 100 Index climbed 0.1%, after Tesco climbed 1.5% on the day, following reports that sales rose in the first quarter. The UK currency rallied for the first time in three days against the Dollar, rising 0.8% in London, as the Pound remains sensitive to signals on inflation and associated interest rate decisions.
The Pound may extend its advance against the Dollar, after two technical indicators known as moving averages crossed. Sterling's 50-day moving average, currently at $1.5424, passed though its 200-day moving average, now at $1.5361. When a shorter-dated moving average rises through a longer-dated one, further gains in a currency are likely.
For the Pound, the cross was the first in three years and the last time the Pound's 50-day moving average climbed through the 200-day measure was in May 2006, which marked the beginning of a 12% rally to a high of $2.1161 in November 2007, the highest level in 26-years. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a currency.
Neil Jones, head of European hedge fund sales in London, said that the "Pound's strength is not over, overseas investors still find UK assets cheap. The risk aversion bubble from excessive fear in 2009 in bursting. The Pound is benefiting as we move away from the fear trade." However, the Pound may lose some ground against the majors this morning, as UK unemployment is expected to increase exponentially on the month in May.
EUR/USD
The Dollar was unable to sustain gains beyond $1.3800 against the Euro yesterday and retained a generally weaker tone over the course of the day. The Euro gained initial support from a further increase in German investor confidence, as the ZEW Index rose to a level of 44.8 in June, from 31.1 the previous month, which was the highest figure for three years.
European companies were still pessimistic over the current economic conditions, which will tend to undermine optimism to some extent. There are also structural Euro-zone fears which will tend to undermine the Euro with escalating fears over banking losses. The U.S housing data was slightly stronger than expected, with starts rising to an annual rate of 0.53 million for May.
Data Released 17th June
U.K 09:30 Average Earnings (3 Months to April)
U.K 09:30 Claimant Count / Unemployment (May)
U.K 09:30 BoE Monetary Policy Committee Minutes June 3/4 Meeting
The Pound declines agains the Dollar, after the CBI says that the economy won't recover until 2010
GBPEUR/GBPUSD
The Pound declined against the Dollar for the second day in succession, falling to a low of $1.6212 in New York, after the Confederation of British Industry said that the nation's economy won't grow until next year. The UK currency also lost ground against the Japanese Yen and Swiss Franc, as the FTSE 100 Index of shares fell the most in more than three weeks, while gilts rose and investors sought the relative security of government bonds.
According to a statement from the CBI, the Bank of England may need to step up quantitative easing and print more money to bolster the economy. UK gross domestic product will contract 0.3% in the second quarter and 0.1% in the third, before stalling in the final three months of the year. The Pound had rallied to its highest level this year against the Dollar on speculation that the economy would recover in the second quarter.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that "sterling is seen as a global recovery story and markets are still a little nervous about the recovery today. If stock continue to fall and risk appetite is going to be under some pressure, then the Pound will probably weaken somewhat against the Dollar."
The Pound dropped against the lower-yielding currencies yesterday, after stocks dipped 2.6% in London, the most since May 21st, while European shares also declined heavily on the day. The Pound actually gained another 0.7% in value against the Euro, rising to yet another yearly high of 1.1827, amid speculation that the UK is ahead of the Euro-zone in terms of economic stabilisation.
According to estimates from the UK debt management office, Britain plans to sell up to £5 billion of bonds through banks today and the first so called syndication since 2005 comes as the Treasury aims to "220 billion thus year to finance an expanding budget deficit. The Chancellor Alistair Darling said in April that the shortfall in the year through March 2010 will reach 12.4% of GDP, the most among the Group of 20 nations.
The CBI's forecasts for the economy are more pessimistic than those of other economists such as Royal Bank of Scotland Group Plc, who said that the economy will resume growth as early as the third quarter. Bank of England policy maker Andrew Sentence also said last week that the recession may be "bottoming out".
Jane Foley, research director at Forex.com, said that "last week's enthusiasm that the UK may be in the early stages of its recovery continues to lift the Pound, although the CBI's forecasts that recovery will not be seen until the first quarter of 2010 have dampened these hopes. This week's unemployment and public sector net borrowing data could test the Pound's current bull run."
The Pound is currently trading just under the high of the year against the Euro and has been flirting with the support level at $1.6350 versus the U.S Dollar. In light of the reports yesterday and the downside risks surrounding the labour market data on Wednesday, Euro and Dollar buyers are well placed to take advantage of the current rate, or at least place a stop order in the market to protect against an aggressive downside move.
Investors will also be watching the performance of the stock market to gauge the prospects of the Pound resuming its upward trend but with the FTSE 100 Index declining for the past two trading days, investors' appetite for riskier assets will be muted. Nevertheless, JP Morgan and Chase Co still anticipate that the Pound will rise to $1.85 by year-end because the U.S currency is weighed down by the fiscal and current account deficits.
EUR/USD
The Dollar rose by the most against the Euro since April yesterday, after Russia's Finance Minister Alexei Kudrin said that his nation has full confidence in the U.S currency, while a drop in stocks encouraged demand for safe havens. The Dollar advanced against 14 of the 16 most actively traded currencies, after Kudrin said two days ago that is was too early to speak of an alternative to the world's main reserve currency.
The Euro also came under renewed selling pressure, after the European Central Bank said that commercial banks in the Euro-zone may lose a further $283 billion by the end of next year. The Euro slumped 1.9% against the Dollar in New York, to a low of $1.3756, the weakest level since May 21st and the intraday loss was the biggest since April 27th.
The ECB expects the Euro-zone economy to contract by around 4.6% this year and 0.3% in 2010. Inflation is expected to average just 0.3% this year. European finance ministers are under pressure from the Group of Eight nation to subject their banks to public and individual stress tests like the U.S have done. Data Released 16th June
The Pound continues to gain ground against the Euro, ahead of a packed week of economic data
Following on from last week, the Pound rallied to the highest level this year against the Euro, rising above 1.1700 for the first time since December, while the UK currency also found support around $1.6350 versus the Dollar. Government bonds slid, pushing the 10-year yield above 4% for the first time in nearly seven months, after Bank of England policy maker Andrew Sentence said that the UK recession may be easing.
The UK currency pushed strongly higher throughout the course of the day on Thursday, peaking above $1.6600 against the Dollar, retesting the resistance level seen briefly last week. The National Institute of Economic and Social Research said that the economy may stop contracting in the second quarter. Sentence said that a recovery may begin "either later this year or early 2010", as inflation expectations increased.
The Pound strengthened as much as 0.6% against the Euro, its highest level since December 2nd, and it also appreciated 1.2% to $1.6556 against the Dollar. The 10-year gilt yield rose more than a percentage point this year, amid signs that the UK economy may recover as soon as this year dampened demand for the safest assets.
The FTSE 100 Index of UK stocks has added 13% since the end of March, as data last week showed that consumer confidence and house prices increased more than economists forecast. The Pound rose against the majors as consumers' expectations for store prices in the next year increased in May for the first time in three quarters.
The survey from the Bank of England also showed that UK inflation in the next 12-months was 2.4% in May, compared with 2.1% in February. The UK currency fell 23% against the Euro and 27% versus the Dollar last year, but the Pound has recovered a lot of ground, amid speculation that the worst of the recession has past.
According to an estimate from JP Morgan Chase & Co, the Pound may extend its gains against the Euro, after breaking through an important technical barrier. A break above 1.1396 was key support from last week's low, following speculation that Gordon Brown was about to bow to political pressure and resign.
Niall O'Connor, a technical currency analyst in New York at JP Morgan, said that "the risks are pointing to an extension of this trend." Support typically marks the lower boundary of a trading range, where buy orders may be clustered. O'Connor has predicted that the Pound will appreciate to 1.1764, the next key area of resistance, a level that marks the 61.8% Fibonacci retracement of the decline since October.
Underlying confidence in the UK economy remains stronger following the recent run of positive economic data. Although the debt position is still very serious, there is additional protection from weak fundamentals elsewhere in the global economy. In particular, doubts over the Euro-zone outlook is providing additional Sterling support but the political stresses could still be a significant factor and therefore the use of a stop order would be a prudent move.
The Pound recorded its biggest weekly advance against the Euro since January, while gilts plunged and government bonds declined, amid increased speculation that the economy maybe set to recover from a recession that projected a 4.1% contraction in growth. The UK housing market is showing tentative signs of "stabilising", while a number of economists believe that the economy may stop contracting in the second quarter.
The Bank of England warned on Friday that the UK housing market slump has mired as many as one in 10 homeowners in negative equity, as their mortgages exceed the value of their properties. Paul Fisher, Bank of England markets Director, said that "although it would be very nice to say the worst is over, we should not be complacent --there are likely to be bumps in the road ahead."
The Pound was unable to push back above $1.6600 against the Dollar on Friday, weakening sharply back towards the lows below $1.6350, as stocks declined and increased the allure of Dollar denominated assets. There was a wider Dollar recovery, while an element of profit taking also came into play, after the UK currency rose to the highest level since November.
Underlying confidence in the UK economy remains firmer following the recent run of favourable economic data and this will probably curb any sustained selling pressure. The overall lack of confidence in the major rivals will still tend to provide important protection to Sterling unless there is evidence of renewed deterioration in the domestic recovery.
The Pound continues to trend higher against the Euro, despite reports from the Confederation of British Industry that the UK economy won't start growing again until 2010 and the Bank of England may need to expand its asset insurance program to kick-start the recovery. Gross domestic product will fall 0.3% in the second quarter and 0.1% in the third, before stalling in the final three months of the year.
In terms of economic data, the main focus this week will fall on the minutes from the Bank of England's last policy meeting. The Monetary Policy Committee elected to keep interest rates unchanged at a record low of 0.5% and neglected to increase quantitative easing measures that have undermined the Pound in recent months.
Elsewhere, the BoE governor Mervyn King is due to deliver his annual Mansion House Speech on Wednesday and investors will be scrutinising his comments on the current economic climate. It's also a key week in terms of data with the latest consumer price index expected to show a sustained downward trend, while retail sales are expected to up 0.4% on the month.
The Pound's upside momentum may come under pressure this week, amid the comments from Mervyn King and the latest inflationary data but the unemployment figures on Wednesday will be of particular concern and will probably reflect the ongoing deterioration in the UK labour market. Nevertheless, the Pound looks to set to retain favour amongst investors, amid speculation that the UK will lead a European recovery.
EUR/USD
The Euro was against unable to hold above the $1.41 level against the U.S Dollar on Friday and slipped to lows around $.13950 in New York. The U.S currency found some underlying support from the Japanese Finance official Yosano's comments that Japan's interest in the dollar was 'unshakeable'. The University of Michigan consumer confidence index edged higher to a reading of 69.0 in June from 68.7 the previous month.
The result of the report was slightly below initial forecasts and there will be some concern that the expectations index weakened, suggesting that the economy could start to deteriorate again within the next few months. In the Euro-zone, industrial production data was weaker than predicted with a 1.9% decline for April and there will be further speculation that the Euro-zone economy will lag behind the rest of the G7 nations, which will limit Euro support.
The Pound continues to make gains against the majors, amid speculation that the economy will recover quicker than expected
GBPEUR/GBPUSD
The Pound rallied to the highest level this year against the Euro, rising above 1.1700 for the first time since December, while the UK currency also found support around $1.6350 versus the Dollar. Government bonds slid, pushing the 10-year yield above 4% for the first time in nearly seven months, after Bank of England policy maker Andrew Sentence said that the UK recession may be easing.
The UK currency pushed strongly higher throughout the course of the day, peaking above $1.6600 against the Dollar, retesting the resistance level seen briefly last week. The National Institute of Economic and Social Research said that the economy may stop contracting in the second quarter. Sentence said that a recovery may begin "either later this year or early 2010, as inflation expectations increased.
Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG, said that "for a central banker to say the economy is bottoming out is a fair statement. But so far everything is based on sentiment, which can turn pretty quickly. Real-time data, like gross domestic product growth, also needs to improve."
The Pound strengthened as much as 0.6% against the Euro, its highest level since December 2nd, and it also appreciated 1.2% to $1.6556 against the Dollar. The 10-year gilt yield rose more than a percentage point this year, amid signs that the UK economy may recover as soon as this year dampened demand for the safest assets.
The FTSE 100 Index of UK stocks added 13% since the end of March, as data last week showed that consumer confidence and house prices increased more than economists forecast. Martin Weale, a director of the NIESR, said that "I had expected it to be more downward momentum, it seems very possible that the UK will show zero per cent growth in the second quarter. I certainly didn't expect that six weeks ago."
The Pound rose against the majors as consumers' expectations for store prices in the next year increased in May for the first time in three quarters. The survey from the Bank of England also showed that UK inflation in the next 12-months was 2.4% in May, compared with 2.1% in February. The UK currency fell 23% against the Euro and 27% versus the Dollar last year, but the Pound has recovered a lot of ground, amid speculation that the worst of the recession has past.
According to an estimate from JP Morgan Chase & Co, the Pound may extend its gains against the Euro, after breaking through an important technical barrier. A break above 1.1396 was key support from last week's low, following speculation that Gordon Brown was about to bow to political pressure and resign.
Niall O'Connor, a technical currency analyst in New York at JP Morgan, said that "the risks are pointing to an extension of this trend." Support typically marks the lower boundary of a trading range, where buy orders may be clustered. O'Connor has predicted that the Pound will appreciate to 1.1764, the next key area of resistance, a level that marks the 61.8% Fibonacci retracement of the decline since October.
Fibonacci analysis is based on the theory that securities tend to rise and or fall by specific percentages after reaching a new high or low. Traders use these percentages, derived from a so called Fibonacci sequence, to forecast where investors may place present buy or sell orders. The Pound rallied earlier this week, as stocks gains and a government report showed that manufacturing in the UK expanded for a second month.
Underlying confidence in the UK economy remains stronger following the recent run of positive economic data. Although the debt position is still very serious, there is additional protection from weak fundamentals elsewhere in the global economy. In particular, doubts over the Euro-zone outlook is providing additional Sterling support but the political stresses could still be a significant factor and therefore the use of a stop order would be a prudent move.
EUR/USD
The Euro found support around $1.3950 against the Dollar on Thursday and then gained steadily during the course of the day. The single currency pushed towards a high above the $1.4150 level against the Dollar in New York, before consolidating just above $1.41 by the close of trading. Global stocks climbed yesterday, sending the MSCI World Index higher for a third straight day, while oil prices advanced above $72 a barrel.
U.S economic data failed to have a major impact, as it was close to market expectations, although there was a small net positive impact on risk appetite. Retail sales rose 0.5% in May, after revised declines of 0.2% the previous month. Much of the increase did, however, reflect the rise in prices, notably energy, rather than any major spending increase.
The Euro has weakened briefly this morning amid speculation that the Latvian Prime Minister has resigned due to political pressures with the Baltic States. The single currency may come under additional selling pressure over the coming days but held just below $1.4100 level with no major fresh market incentives.
The Pound rallies to the highest level this year against the Euro
The Pound has rallied to the highest level this year against the Euro, as the UK currency breached 1.1700 for the first time since November last year and moved to test so called resistance levels around 1.1764. The UK currency also retained a solid tone against the U.S Dollar, pushing above $1.6400, amid an improvement in risk appetite and UK economic data.
The latest round of manufacturing reports recorded a small increase in April industrial production, which was confirmed as there first rise in 14-months. The positive tone of the data will help to underpin market confidence towards the Pound, even though the trade was worse-than-expected with a rise in the deficit to £7 billion, from 6.5 billion in March.
The National Institute of Economic and Social Research recorded a 0.9% decline in UK gross domestic product in the three months through May, but stated that the economy could register growth in the second quarter, which reinforced optimism over near-term trends. Overall risk appetite remains firm which will continue to support Sterling in the near-term, despite insecurity surrounding the government.
The Pound is currently at the highest level since November 5th against the Euro and buyers may wish to take advantage of the current rate, as the UK currency may counter strong resistance. In addition, the political uncertainty surrounding Gordon Brown's tenure as Prime Minister may surface once again and therefore the use of stop order would be a particularly shrewd move.
Euro buyers can secure a minimum rate of 1.1600 at present and if the market continues to move higher, then we can improve your worse case scenario. However, if the market dips from the current levels, the security of the stop order would prevent any potential losses on the downside. Dollar buyers can also use a stop order to secure a rate around $1.62 and if you would like to discuss risk management on your currency purchase, please contact me on my direct line listed below.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound rallies back against the majors, as political pressures on Gordon Brown subside
The Pound bounced back against the majors yesterday, rising towards the highest level in almost a week versus the U.S Dollar, as overall confidence in the UK economy remained slightly stronger following recent favourable trends in the housing sector. The Royal Institution of Chartered Surveyors reported that the UK housing market is "stabilising", stoking optimism that the worst of the recession has past.
The number of respondents in the monthly survey saying home values fell, exceeding those reporing gains by 44.1 percentage points, the most positive reading since November 2007. The smallest balance of real-estate agents and surveyors in 18 months reported price declines, as property sales rose to the highest level since August 2008.
The Nationwide Building Society and Halifax have both reported that home values climbed in May, as evidence mounts that the property slump is past its worst. However, the Deputy governor of the Bank of England Paul Tucker said yesterday that the outlook for the UK economy may remain "unclear" until the third quarter.
Ian Perry, a spokesman for the Royal Institution of Chartered Surveyors, said in a statement that "on the face of it, the housing market does appear to be close to bottoming out with activity picking up in a material way and prices at last stabilising. However, it is important to remember that the lack of supply has been as important in underpinning prices as the rise in demand."
Lloyds Banking Group Plc's Halifax business says that house prices increased 2.6% in May, the most since 2002, while the Nationwide Building Society confirmed that price increases matched the biggest gain since 2006. A separate report from the British Retail Consortium showed that retail sales at stores open for at least 12-months still fell 0.8% in May, as the economy shrank 1.9% in the first quarter, the most since 1979.
The Bank of England elected to keep UK interest rates on hold at 0.5% last week and reiterated plans to spend £125 billion in newly printed money in UK debt markets to help bolster the economy. The Central Bank said yesterday that it may widen the range of assets it's buying to include secured commercial paper.
The Pound also rose versus the Japanese Yen yesterday and rallied towards the highest level this year against the Euro, amid speculation that Gordon Brown has fended off calls to step down, following a series of ministerial resignations and a drubbing in the local and European elections. Gavin Friend, a market strategist at National Australia Bank, said that "the housing data and the improvement in Gordon Brown's fortunes for the time being are providing support for the Pound."
The renewed appetite for risk also saw UK stocks stabilise after three days of declines and the FTSE 100 Index was little changed after the housing report. While a gain in oil prices boosted energy producers, offsetting concerns that a three-month rally has outpaced earnings expectations. The benchmark FTSE 100 Index slipped less than 0.1% and has surged 25% from this year's low on March 3rd.
The Pound rallied 1.3% against the Dollar yesterday, and rose to a high of $1.6400 this morning, as the improvement in risk appetite encouraged investors to reduce their holdings of dollar denominated assets. The UK currency also rose 0.6% against the Euro to a high of 1.1640, as Gordon Brown's rousing speech won the support of most Labour lawmakers by promising to make unspecified changes to his leadership style and agenda.
David Bloom, global head of currency strategy at HSBC Treasury & Capital Markets in London, said that "1.60 is par value, there is no reason the U.S and the UK shouldn't fight it out to an absolute draw where both economies look identical in terms of quantitative easing and some signs of life in terms of a recovery."
The UK industrial and trade data will be watched closely on Wednesday and evidence of stabilisation in the manufacturing sector would provide some further degree of support in Sterling. The Pound also gained yesterday despite fresh concerns over the UK labour market, as Lloyds Banking Group Plc announced plans to cut as many as 1,660 full time jobs and shut all of its Cheltenham & Gloucester branches.
EUR/USD
The Euro found support below $1.3900 against the Dollar on Tuesday and then advanced steadily throughout the course of the day. There were no major data influences during the day, but there were a series of small factors which provided support for the single currency. Immediate concerns surrounding a substantial currency devaluation in Latvia eased, following remarks from the government that it was out of the question.
The news temporarily erased concerns over the European banking sector for the time being and helped support the Euro, despite reports that German exports declined and industrial production fell by much more than the expected 1.9% in April. The Dollar declined against almost all of the 16-most actively traded currencies and for the first time against the Euro in three days, amid speculation that the global recession may be ending.
Goldman Sachs Inc recommended that its clients buy the Euro against the Dollar, citing a recovery in global growth expectations and a "broader pickup" in demand for higher-yielding assets. Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp, said that "investment is slowly leaking out of the Dollar, into emerging markets and other higher-yielding countries on signs of a green-shoot recovery."
U.S economic data recorded a rise in the IBD consumer confidence index and a drop in wholesale inventories for the eighth consecutive month. The Dollar struggled to find any support on yield grounds with a lack of conviction that the Federal Reserve will move towards higher interest rates in the near-term.
The Pound rebounds against the majors, as Brown resists calls to resign
GBPEUR/GBPUSD
The Pound maintained a generally weaker tone in Europe yesterday, dropping to lows close to $1.5800 against the Dollar, the lowest level in more than a week. The Prime Minister Gordon Brown confronted fresh attempts to oust him following a drubbing for the Labour Party in the European Union parliamentary elections.
Brown meets with 350 Labour members of Parliament today, after the party finished third in the EU elections with a 15.7% of the vote, down 7 percentage points from 2004. Michael Klawitter, a currency strategist in Frankfurt at Commerzbank AG, said that "the more Brown resists calls to resign, the more this will weigh on the Pound. He is perceived as no longer being able to handle the economic problems."
There was also further downward pressure on the Pound following reports that the Irish credit-rating had been downgraded, which tended to revive fears over the UK debt position and concerns over the potential for a medium-term UK downgrading. The Pound also declined against the Euro and the Japanese Yen, after former MPC member David Blanchflower said that the Bank of England may expand its asset insurance program.
The Central Bank have been buying assets with newly created money as the economy contracts at the fastest pace since 1979 and Blanchflower said that policy makers may expand quantitative easing measures if the economy keeps shrinking. The Bank may seek to spend more that the £150 billion authorized by the Treasury, as well as buying different types of bonds.
Blanchflower also said that the UK economy will remain entrenched in a recession for another year, despite the positive tone of UK fundamentals. The Monetary Policy Committee entered its fourth month of money printing last week and emphasised its commitment to spend £125 billion. Blanchflower also warned that the biggest concern is still that the steepest recession since the Second World War will cause an extended drop in consumer prices, stoking deflationary pressures.
The Bank of England said last month that the inflation rate will probably drop to around 0.4% by the end of this year and will reach only 1.2% in the middle of 2011. The Central Bank has so far bolstered money supply by purchasing £77 billion in government bonds and added £2.1 billion in commercial paper.
Barclays Plc has recently raised its forecast for UK gross domestic product on June 4th, after a report showed that service industries unexpectedly grew for the first time in a year. The UK economy will stop contracting in the third quarter of this year but Blanchflower said, "I'd be surprised to see a positive quarter of growth in 2009. Expansion probably won't resume until the second quarter of 2010. Certainly the labour market is going to be pretty terrible for quite a long time"
The Pound also came under pressure in early Europe as UK stocks fell for the first time in three days, amid speculation that a 26% rally in the FTSE 100 Index has outpaced expectations for earnings and economic growth. Lloyds Banking Group Plc slumped 7.7%, after selling shares to repay government funds.
The Pound has suffered its biggest weekly decline against the Dollar in three months last week, as six government ministers resigned and Labour lost 291 seats of the 469 they held before the UK local elections. However, the UK currency secured some support at lower levels with a significant correction back towards $1.6050 against the Dollar by the close of trading last night.
The Pound also gained some respite from an an easing of immediate political tensions, as the challenge to the Prime Minister faded with his supporters saying that his resignation would be electoral suicide. The UK currency gained ground against the Euro with a move towards 1.15 and the Pound has held steady this morning as the RICS House Price Balance showed that less than half of estate agents recorded lower prices in May.
According to a report from the Nationwide Building Society last week, consumer demand rose by more than expected in May, while UK service industries grew and house prices unexpectedly rose 2.6% in April. Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd, said that "recent data in the UK surprising to the upside. That has led to expectations a recovery is imminent, and consequently the market started pricing in a 25 basis point rate increase as early as 2010."
EUR/USD
The Euro rallied against the Dollar from the lowest level in week yesterday but the single currency was unable to recapture the $1.4000 level, dipping to lows near 1.3800 in early Europe. The Euro was unsettled by structural factors during the course of the day, as there were further uncertainties over the Baltic economies.
The speculation that there will be substantial currency devaluations will increase concerns over losses with the European banking sector and this would tend to undermine the Euro. In addition, the downward pressure on the single currency intensified after a second downgrading of the Irish credit rating. In terms of economic data, an improvement in business confidence and a no change for German factory orders failed to have any major impact.
The Dollar looked to gain support from higher bond yields and speculation that the Federal Reserve could raise interest rates before the end of 2009. Losses in the Dollar were tempered as investors raised bets that the Federal Reserve will increase its target lending rate by the end of the year, as the U.S economy recovers.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound decliens heavily against the majors, amid further political stresses and declines in risk appetite
GBPEUR/GBPUSD
Following on from last week, the Pound fell significantly against all major currencies, dipping to lows around $1.58 against the Dollar, while the UK currency also declined heavily against the Euro, despite a barrage of positive economic reports. UK data remained stronger-than-expected with a reported 2.6% increase in house prices for May and producer prices rose for a third straight month.
The report from the Office of National Statistics showed that UK producer prices rose for a third straight month in May, as companies passed on higher fuel prices and a tax increase on alcohol and tobacco products. The gauge of inflation climbed 0.4%, compared with a 0.7% gain in April, as oil prices rose 30% since the beginning of May.
The Bank of England left interest rates on hold at the record low of 0.5% at the latest monetary policy committee meeting. The Central Bank also left the amount of quantitative easing unchanged at £125 billion, with comments that the current schedule of bond purchases would be completed within two weeks.
The Interest rate announcement and steady policy did not have a major impact on Sterling but the UK currency was undermined by rumours that the Prime Minister Gordon Brown had resigned, due to political pressure over his handling of the economic crisis. The Pound subsequently dropped towards $1.6100 against the Dollar on Thursday, and the UK currency retraced sharply versus the Euro, falling back towards the significant Fibonacci level at 1.1280.
The flurry of ministerial resignations has placed additional pressure on Gordon Brown to resign and the Pound tumbled as Rio Tinto Group was reported to have rejected an investment from Aluminum Corp of China. The UK currency has plummeted to its lowest level this month against the Dollar, as traders speculated on the probability that Brown is poised to resign.
The Pound recovered moderately after a government spokesman said that the rumour was "nonsense" but Sterling declined in tandem with other high-yielding currencies, as two people involved in the Rio talks said that the company planned a stock sale to replace $19.5 billion it would have received from the deal with the Chinese.
Jeremy Stretch, a senior currency strategist at Rabobank International in London, said that "we've seen a lot of interest coming on the Rio Tinto deal, potentially flows which have gone through both Sterling and the Aussie." The Pound fell to a low of $1.6090 against the Dollar, the lowest level since May 29th and as we reported last week, the upside rally that saw the Pound appreciate 12% against the greenback, seems to be running out of steam.
The Pound recorded the biggest monthly gain against the Dollar in 25-years in May, as record low interest rates and additional government stimulus revived consumer confidence. Property values also increased and stoked speculation that the UK economy is recovering from the worst recession in at least three decades.
The Pound's 14-day relative strength index dropped to a level of 64 yesterday, after staying above 70 for eleven days, a level that indicates an asset may be about to reverse direction. The rejection of the upper levels against both the Dollar and the Euro suggests that the UK currency may be poised for a sustained downward move, hence our recommendation for the use of stop orders in last Wednesday's update.
The Pound has enjoyed three weeks of gains against the majors, even amid disclosures by the Daily Telegraph about personal spending by politicians at taxpayers expense, prompting four ministers to resign. The Labour Party actually finished third behind the Conservatives and Liberal Democrats in the UK local elections, putting further pressure on Gordon Brown to quit.
Ulrich Leuchtmann, head of foreign-exchange research at Commerzbank AG, said that "rising uncertainty about the future of the UK government may weigh on the Pound in the short-term." Goldman Sachs Group Inc advised investors on Wednesday to drop bets that the Pound will gain against the Dollar, after the UK currency reached a high of $1.6500 earlier this week.
The technical picture is looking particularly grim after last week's surprise downward move. Euro and Dollar buyers may wish to place stop orders around 1.1200 and 1.5800 respectively to prevent against a short-term sell-off. The Pound suffered its biggest weekly decline in three months against the Dollar, as Brown rearranges his cabinet, amid a series of resignations and calls for him to step down.
Six government ministers have quit following the dismal results of the local council elections, after the Labour Party lost more than 100 seats of the more than 2,000 contested. Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd, said that "the Pound is currently a sell. A Brown resignation and the demise of the Labour Party will, longer-term, prove to be Pound positive, so I would suggest selling the Pound now but leave bids once the dust has settled on a Brown resignation."
EUR/USD
The Euro consolidated above $1.4150 in European trading on Friday, maintaining a relatively cautious tone ahead of the monthly U.S employment report. The headline figure was substantially stronger-than-expected with an employment decline of 345,000 for May, after a downwardly revised 504,000 fall for the previous month.
The U.S lost fewer jobs than forecast in May, reinforcing signs that the steepest recession in half a century is starting to abate. However, the jobless rate increased to 9.4%, the highest level since 1983, partly due to the increase number of people joining the labour force looking for work. Nariman Behravesh, chief economist at IHS Global Insight in Lexington, said that "the recession is very close to an end. The Labour market is still pretty awful, but vastly better than it was."
The Dollar rallied against the majors, while Treasuries fell, amid renewed optimism that the economy will rebound over the coming months. Still, figures showed a drop in productivity and a slowdown in personal earnings, indicating that any recovery may be muted. Americans are spending less and saving more as home values continue to deteriorate and companies slash their workforce.
The chairman of the Federal Reserve Ben Bernanke said last week that the U.S may suffer additional "sizeable" job losses, while economic growth will return "later this year" and unemployment will rise "into next year". The Euro was unable to hold above $1.4250 against the Dollar and then weakened sharply in New York, to lows below $.14000, which represented the sharpest decline since April.
According to a report from the Royal Bank of Canada Europe Ltd, the Dollar will rally towards $1.33 against the Euro by the end of June because its recent depreciation was "overextended". The U.S currency has weakened roughly 13% versus the Euro in the past three months, as tentative gains in stocks encouraged investors to switch to higher-yielding assets.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound declines heavily against the majors, amid speculation that Gordon Brown is set to resign
GBPEUR/GBPUSD
The Pound fell significantly against all major currencies yesterday, dipping to lows around $1.61 against the Dollar, while the UK currency also declined heavily against the Euro, despite a barrage of positive economic reports. UK data remained stronger-than-expected with a reported 2.6% increase in house prices for May, according to the latest Halifax survey.
The Bank of England left interest rates on hold at the record low of 0.5% at the latest monetary policy committee meeting. The Central Bank also left the amount of quantitative easing unchanged at £125 billion, with comments that the current schedule of bond purchases would be completed within two weeks.
The Interest rate announcement and steady policy did not have a major impact on Sterling but the UK currency was undermined by rumours that the Prime Minister Gordon Brown had resigned, due to political pressure over his handling of the economic crisis. The Pound subsequently dropped towards $1.6100 against the Dollar last night, and the UK currency retraced sharply versus the Euro, to a low of 1.1281.
The flurry of ministerial resignations has placed additional pressure on Gordon Brown to resign and the Pound tumbled as Rio Tinto Group was reported to have rejected an investment from Aluminum Corp of China. The UK currency has plummeted to its lowest level this month against the Dollar, as traders speculated on the probability that Brown is poised to resign.
The Pound recovered moderately after a government spokesman said that the rumour was "nonsense" but Sterling declined in tandem with other high-yielding currencies, as two people involved in the Rio talks said that the company planned a stock sale to replace $19.5 billion it would have receive from the deal with the Chinese.
Jeremy Stretch, a senior currency strategist at Rabobank International in London, said that "we've seen a lot of interest coming on the Rio Tinto deal, potentially flows which have gone through both Sterling and the Aussie." The Pound fell to a low of $1.6090 against the Dollar, the lowest level since May 29th and as we reported yesterday, the upside rally that saw the Pound appreciate 12% against the greenback, seems to be running out of steam.
The Pound recorded the biggest monthly gain against the Dollar in 25-years in May, as record low interest rates and additional government stimulus revived consumer confidence. Property values also increased and stoked speculation that the UK economy is recovering from the worst recession in at least three decades.
The Pound's 14-day relative strength index dropped to a level of 64 yesterday, after staying above 70 for eleven days, a level that indicates an asset may be about to reverse direction. The rejection of the upper levels against both the Dollar and the Euro suggests that the UK currency may be poised for a sustained downward move, hence our recommendation for the use of stop orders in yesterday's update.
The Pound has enjoyed three weeks of gains against the majors, even amid disclosures by the Daily Telegraph about personal spending by politicians at taxpayers expense, prompting four ministers to resign. The Labour Party may actually finish third behind the Conservatives and Liberal Democrats in the UK local elections, putting further pressure on Brown to quit.
Ulrich Leuchtmann, head of foreign-exchange research at Commerzbank AG, said that "rising uncertainty about the future of the UK government may weigh on the Pound in the short-term." The Pound rose earlier in the day after the Bank of England kept interest rates on hold and UK house prices unexpectedly gained by the most since 2002.
Goldman Sachs Group Inc advised investors on Wednesday to drop bets that the Pound will gain against the Dollar, after the UK currency reached a high of $1.6500 earlier this week. The technical picture is looking particularly grim after yesterday's surprise downward move and Euro and Dollar buyers may wish to place stop orders around 1.1200 and 1.5800 respectively to prevent against a short-term sell-off.
EUR/USD
The Euro rose against the Pound and the Japanese Yen yesterday, after the European Central Bank left interest rates on hold at 1.0%, maintaining a yield advantage over its U.S and UK counterparts. At the accompanying press conference, the President of the Central Bank Jean-Claude Trichet was slightly more optimistic over the prospects of an economic recovery.
The single currency also erased a decline against the U.S Dollar as Trichet indicated that the ECB had no immediate plans to cut interest rates further and said that current levels are "appropriate." He also said that the region's economic performance will improve this year and that it's "extremely important" U.S policy makers are reiterating support for a strong dollar.
The Central Bank held its main refinancing rate at an all-time low of 1%, after reducing it last month, and policy makers also plan to start buying covered bonds next month to hold down borrowing costs and complete the €60 billion program into June 2010. The Euro has gained 5.8% against the Dollar since the ECB last met in May, as data indicates that the worst of the recession has passed.
Global financial markets remained cautious in the aftermath of the announcements, which tended to curb any selling pressure on the U.S Dollar. Underlying confidence in the U.S currency will remain tentative at best, as we build-up to the monthly U.S job report this afternoon. Initial jobless claims was slightly lower than expected with a decline of 621,000 in the latest week. Data Released 5th June
The Pound declines heavily against the majors, as investors deem the recent gains to be excessive
GBPEUR/GBPUSD
The Pound maintained a very strong tone in early trading on Wednesday, climbing to a fresh six-month high against the Euro and surpassing $1.6600 for the first time in seven months. UK consumer confidence rose in May to its highest level this year, fueling speculation that the worst of recession is over.
According to the report from the Nationwide Building Society, an index of consumer sentiment rose 2-points to a reading of 53.0, as shoopers became more optimistic that the UK economy will recover from the recession later this year. The Bank of England may decide today not to expand its plan to bolster the economy through quantitative easing measures, as evedence emerges that the slump is easing.
Elsewhere this week, UK mortgage approvals rose to the highest level this year, while house prices stopped falling for the first time in almost 2-years. Consumer confidence appears to be recovering to its highest level this year but Martin Gahbauer, chief economist at Nationwide, said in a statement that "we continue to see contrasting news about the state of the economy, it is likely that confidence will remain fragile."
The Pound advanced against the Dollar for a fourth consecutive day yesterday, rising above 1.6600, while the UK currency strengthed to 1.1623 in London, after a separate report showed that UK service industries from banks to airlines unexpectedly grew for the first time in a year. An index based on a survey of about 700 companies rose to 51.7 in May, from 48.7 the previous month.
The report from the Chartered Institute of Purchasing and Supply adds to evidence that the deepest recession in a generation may be past its worst stage. Kenneth Broux, an economist at Lloyds Banking Group Plc in London, said that "one can be fairly confident in saying that the UK economy bottomed in the first quarter. The bank will be pretty pleased, it will be confident that it's done the right thing and that it can afford to wait and see how the data evolve."
The index of UK services hasn't been above a reading of 50 since April last year, indicating growth in the sector. The report from Markit coincides with seperate data that its manufacturing index also rose to the highest level this year, while a gauge of construction climbed to a 13-month high. The UK economy contracted at 1.9% in the first quarter, the most since 1979, while the Bank's quarterly economic forecasts show growth resuming next year and inflation slowing to 0.4%.
Signs that the recession is easing comes as the Prime Minister Gordon Brown struggles to shore up his authority, amid plunging approval ratings, a scandal over lawmakers' personal spending and resignation calls from former supporters. The Guardian newspaper, which is typically a supporter of the Labour Party, yesterday called for his removal.
The Pound also made substantial gains against the Dollar in early Europe yesterday, following reports that Australia's economy unexpectedly grew in the first quarter, underpinning risk appetite and reducing the allure of safe havens. However, the UK currency lost ground throughout the course of the day, as UK stocks fell for a second day.
The benchmark FTSE 100 Index lost a further 1.8%, retreating from the highest level in almost five months, after Barclays Plc's Abu Dhabi investors sold a stake in the lender. James Hughes, a londan based market analyst at CMC Markets, said that "we are seeing a carry on from yesterday's profit taking, I don't think the rally we have seen is necessarily over, we could restest the highs of this year."
The Pound subsequently fell by the most in six weeks against the Dollar, as stocks dropped worldwide on speculation that a three-month rally in equity markets has been overdone and outpaced economic growth. The UK currency weakened against the Euro, Japanese Yen and Swiss Franc, as the FTSE 100 Index declined.
Goldman Sachs Group Inc advised investors yesterday to drop bets that the Pound will strengthen against the Dollar, after a 12% gain this year. Mike Berg, a currency strategist at 4Cast Ltd, said that "when the equity market cools off, sterling loses its upside momentum. The trend has been so strong despite fundamentals that you have to look for something else for retur, and it's back to equities."
The Pound fell as much as 1.8% against the U.S Dollar, the biggest intraday decline since April 22nd, and traded at $1.6291 by the close of the European session. Commerzbank AG, Germany's second largest lender, also said yesrterday that the Pound's 11% advance against the Euro this year may be about to stall.
The Pound appears to be running out of steam against the major currencies, as investors judge that its advance to a seven-month high against the Dollar is excessive, given the prospects for UK economic growth and corporate earnings. Euro and Dollar buyers would be well advised to take advantage of the current, or at least place stop orders in the market to protect against a sustained downward move.
The Pound rallies to fresh yearly highs against the majors, amid speculation that an economic recovery is under way
GBPEUR/GBPUSD
The Pound resumed its upward momentum yesterday, rising to a fresh seven month high 1.6610 versus the U.S Dollar, while the UK currency also rose to an annual high of 1.1640, as reports on the housing market and manufacturing fueled optimism that the worst of the recession is over. In addition, the supply of credit to British companies deteriorated at a slower pace in May.
The revival in risk appetite has seen the Pound record the biggest monthly gain in almost 25-years against the Dollar in May, as global equity markets rally on speculation that an economic recovery is underway. UK mortgage approvals increased beyond initial estimates in April, rising to the highest level in a year, underpinning demand for homes as the property-market slump shows signs of easing.
According to the report from the Bank of England, lenders granted 43,201 home loans in April, compared to 40,038 the previous month. Economists had predicted a 41,000 increase, as house prices stopped falling for the first time in 20-months. A revival in lending may lay the foundations for the recovery in the housing sector, as additional government stimulus encourages banks to lend again.
The Bank of England are expected to keep interest rates steady at a record low of 0.5% on Thursday and continue with its asset insurance program of pumping newly created money into the economy to help growth. George Buckley, chief UK economist at Deutsche Bank AG in London, said that "it's encouraging, though it's significantly less than the peak, we need to see it rise further yet before we can say that the rout in house prices has ended."
Net lending secured on houses rose by more than half to £973 million in April, while average house prices held steady at £155,000 in May, after they declined 0.3% in April. A separate report from the Nationwide Building Society showed that home values unexpectedly jumped by the most since 2007. UK consumer confidence also improved over the past month, matching the highest level in almost a year.
A survey from the Confederation of British Industry yesterday showed that companies expect the supply of existing credit to stabilise, despite indications from the Royal Bank of Scotland Group Plc that bad loans may increase this year. The Deputy governor of the Bank of England Charles Bean, said last month that the supply of credit may "remain impaired for some while". Policy makers received backing from Treasury to print as much as £125 billion in new money and spend it on assets, including government debt in an effort to get banks lending again.
The Pound extended its gains against the U.S Dollar yesterday, rising through key resistance at 1.6526, after data in the U.S showed that the number of Americans signing contracts to buy existing properties climbed by the most in over seven years. Geoffrey Yu, a foreign exchange strategist at UBS AG in London, said that "the Pound-Dollar is moving on risk and we're treating it as a prime vehicle to express a rebound view, any positive news and people will get into it."
Further evidence of a revival in the housing market will reinforce speculation that record low interest rates and government stimulus measures will help revive the UK economy, after it contracted 1.9% in the first quarter, the most since 1979. The Pound also stood firm yesterday, despite UK stocks retreating from the highest level in almost five months, after Barclays Plc's Abu Dhabi investors sold a stake in the lender.
The FTSE 100 Index lost 0.7% to 4,477.02, erasing some of Monday's 2% rally but the increased optimism surrounding the global economy means any retracement is unlikely to last. The Pound may continue to strengthen against the Euro because "recent UK housing data are showing consistent signs of recovery", according to a statement from RBS Plc. In addition, Gerry Gibb, a currency strategist at RBS said yesterday that the lack of momentum in the Euro "is consistent with the more muted recovery in economic data that the other major or developing economies".
EUR/USD
The Euro continued to take full advantage of broad Dollar weakness yesterday but the single currency's rally against its U.S counterpart may be entering its "last stage," and investors would likely benefit from selling the 16-nation currency against the Dollar, according to a report from UBS AG. The Euro may weaken towards $1.3000 within the next three months, as "equity and bond flows have the potential to surprise and could lend support to the Dollar".
The Euro traded at a high of $1.4168 versus the Dollar yesterday, gaining 6.3% over the past month, to the highest level this year. However, reports yesterday showed that European unemployment rose to the highest level in nearly 10-years in April, as the worst global economic slump in more than sixty years forced companies to cut production and slash jobs.
The jobless rate in the Euro-zone increased to 9.2%, from 8.9% in March, the highest level since September 1999 and exceeded economists' prediction of a rise towards 9.1%. The global slump has curtailed demand for Euro-zone exports and corporate investment, pushing the economy into the steepest contraction in at least 13-years.
The European Central Bank have been reluctant to follow the Bank of England and the Federal Reserve in cutting rates to near zero per cent. However, policy makers have pledge to buy €60 billion of covered bonds, low-risk mortgage backed securities and public sector loans. The Central Bank will unveil details of the asset-purchase plan along with the latest economic forecasts when council members meet on Thursday.
The Pound rallies to the highest levels this year against both the Euro and the Dollar
GBPEUR/GBPUSD
The Pound rallied to a fresh yearly high against the U.S Dollar yesterday, rising through $1.6400 for the first time since November 5th, while the UK currency also broke through the key resistance level at 1.1574 versus the Euro, to record the highest level this year. Gilts also declined amid further evidence that manufacturing and the housing market is showing signs of recovery.
According to a report from Hometrack Ltd, UK house prices stopped falling in May for the first time in almost two years, adding to recent data from the Nationwide Building Society that the property market slump is easing. Average prices in England and Wales held steady at £155,000, after declining 0.3% in April. Home values have dropped 9.6% over the past year but the Bank of England's aggressive easing of monetary policy is slowly lifting the economy out of the worst slump in at least thirty years.
Policy makers have lowered the benchmark interest rate to an historic low of 0.5% and embarked on period of quantitative easing, through the purchase of government and corporate bonds with newly created money. Reports last week confirmed that consumer confidence held steady at the highest level in nearly a year, while house prices unexpectedly gained by the most since 2007, partly due to the lack of properties on the market.
Although the survey yesterday provides some optimism that the UK economy is through the worst of the recession, Richard Donnell, director of research at Hometrack Ltd, said in a statement that "the outlook for the economy remains far from certain. It is too early to rule out future price falls." Other economic indicators are also suggesting that the recession may be past its worse faze.
An index of UK manufacturing rose more than economists' had predicted in May, as the Markit index rose to a reading of 45.4, the highest level in 12-months. A gauge based on a survey of UK factories climbed from 43.1 in May and although a reading below 50 indicates contraction, the report reinforces the view that the economy may recover sooner than expected.
The Bank of England will probably decide this week to leave UK interest rates unchanged at a record low and continue a £125 billion asset insurance program to assist in the recovery. However, Alan Clarke, an economist at BNP Paribas SA in London, said that "we may get a positive number sometime soon, though a proper recovery is still some way off."
Former Bank of England policy maker David Blanchflower said yesterday that he still sees "risks to the downside" in the economy and sighted unemployment as the chief concern. Blanchflower warned that there will be "big increases" in unemployment this year with jobless claims set to soar by an average of 100,000 a month "for the next year or so".
Blanchflower also said that it was too early to gauge whether the Bank of England's aggressive policies are helping counter the worst recession in a generation. In an interview on BBC Radio 4, he said that "people are going to have to get used to these very large numbers. I don't think people have thought what it would mean to have a million people under 25 unemployed by September".
Blanchflower spoke the day after he stepped down from a three-year term on the Bank's monetary policy committee, where he said as early as November 2007 that the UK face a recession, well before his esteemed colleagues. However, his comments yesterday did little to curtail the Pound's momentum, as the UK currency continued to advance against the majority of the 16-most actively trade currencies.
The FTSE 100 Index advanced to the highest level in almost five months yesterday, as the optimistic tone of the economic data increased an element of risk appetite. UK stocks have gained 28% from this year's low on March 3rd, while the rally in commodity prices and especially oil signals that investors are confident that an economic recovery is in place.
Sagiv Perez, chief analyst at Finotec Trading UK Ltd, said that the "Pound advanced on further risk appetite and improvement in the conditions of the manufacturing sector." The UK currency will reach $1.7200 against the U.S Dollar over the next three months, following its biggest monthly gain in almost a quarter of a century.
Daragh Maher, deputy head of global foreign-exchange strategy in London at Carlyon, said that the "Pound may take a breather as it approaches $1.6500 before resuming its advance against a defensive Dollar." There will be the risk of further high volatility in the near-term, as the trend in risk appetite continues to drive the Pound with some potential profit taking ahead of Thursday's Bank of England rate announcement.
EUR/USD
The Dollar declined against the Euro yesterday and lost ground versus all of the higher-yielding currencies, after reports in the U.S and China showed that global growth may be recovering, sparking demand for riskier assets. The Dollar also came under further pressure as oil prices surged higher and manufacturing shrank at the slowest pace in eight months.
The report from the Institute for Supply Management showed that factory output in the U.S declined less than expected, spurred by the first gain in new orders since the recession began. Stocks rallied worldwide amid signs that companies are becoming increasingly optimistic that the recession will end this year.
The recovery in the manufacturing sector may be restricted by the highest savings rate in 14-years, while yesterday's bankruptcy of General Motors Corp could also retrain any significant rebound in industrial production. The factory index rose to a reading of 42.8, the highest level since September, from 40.1 in April.
U.S stocks rose, extending a global rally in equity markets, as the S&P 500 index gained 2.6% to a close at 942.87 in New York. Elsewhere, U.S consumer spending fell just 0.1% in April and the savings rate rose to 5.7%, spurred by an unexpected jump in personal income, linked to fiscal stimulus measures.
The Dollar has fallen to near 2009 lows at $1.4250 against the Euro, while the U.S currency has also lost ground on a trade-weighted basis. There were also renewed losses in the U.S bond market, which also contributed to a weaker Dollar, amid underlying fears over central bank reserve diversification.
The Pound rallies against the majors, amid increased optimism for the global economy
Following on from last week, the Pound weakened moderately against the Euro on Friday, dropping back towards 1.1400, while the UK currency was again able to take advantage of renewed Dollar weakness, strengthening to the highest level in seven months. The Pound has continued to gain support from optimism that the global economy is recovery from the fist simultaneous recession in sixty years.
The UK currency posted its biggest monthly gain against the Dollar in almost 25-years, amid growing optimism that the economy is emerging from the deepest recession since the Second World War. The Pound rallied for the third week in four and traded at highest level against the Dollar this year, with the next key resistance level at $1.6285.
A report from the Nationwide Building Society showed that UK house prices unexpectedly rose in May, matching the biggest monthly gain since 2006. The average cost of a home in Britain jumped 1.2% to £154,016, after declining 0.3% in April, a sign that the slump in the property market is easing. The result of the data was significantly better than economists' predicted and the Pound subsequently rallied on Friday against all of the 16-most actively traded currencies.
Martin Gahbauer, Nationwide's chief economist, said that the report is "further evidence of some improvement in housing market conditions over the last few months. Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively."
The last time that prices rose this month on the month was in October 2007, when they climbed 1.2% and that was the biggest increase since December 2006. Home values fell 11.3% from a year earlier in May, compared with a 15% drop in April, while a seperate report from the British Bankers Association showed that mortgage approvals rose for the same period.
Rising unemployment may still curtail a significant recovery in the housing market and prices may keep falling for the rest of the year, as more Britons lose their jobs. A lack of supply of properties for sale on the market may help explain last month's gains, as sales still remain close to the lowest level on record.
Elsewhere, UK consumer confidence matched the highest level in 11-months in May, as people became more optimistic on the prospects on an economy recovery. An index of sentiment remained unchanged at a reading of minus 27, despite rising unemployment, while retailers' sentiment about their businesses rose to the highest level since 2007.
The report from the Confederation of British Industry was much more positive than initial forecasts, despite expectations that the UK economy will endure its worst recession since the Second World War. Rachael Joy, an analyst at Gfk, said in a statement on Friday that sentiment "is still very low historically, but is at least standing firm in the face of continuing depressed markets and May's warning of a possible pandemic."
Consumer and business confidence has withstood concerns on the global spread of swine flu in May. Britain has the sixth-highest total of confirmed swine flu cases, with 137 people diagnosed with the strain of influenza, formerly known as H1N1, according to data released by the World Health Organisation on May 27th.
The Pound rallied 9.4% in value last month, the most since March 1985, and the UK currency has risen to another yearly high of $1.6300 this morning and the pace of the upside moves shows few signs of abating. The UK currency also gained 2.8% against the Euro last month and investors are speculating that the Pound's 18% decline against the Dollar over the past year is increasing the allure of UK denominated assets.
The government has increased spending exponentially to kickstart the economy, helping to increase the budget deficit to a forecast £175 billion this year. Almost a quarter of the 220 fund managers surveyed by Merrill Lynch & Co in May said that the UK currency is undervalued at its current level. The Pound has climbed 2.7% since it smashed through its 200-day moving average versus the Dollar on May 20th, an indication to investors who use charts to plot currency moves that sterling will extend its advance.
EUR/USD
The Euro strengthened to fresh 2009 highs with a peak above $1.4150 in U.S trading. The Dollar was unable to regain ground in early trading on Friday and was subjected to further selling pressure through the course of the day, amid further strong interest in commodities. The U.S currency was also undermined by concerns over the reserve diversification by foreign central banks, after comments from the South Korean central bank that is was looking to reduce its U.S debt holdings.
In terms of economic data, the Chicago PMI manufacturing index was significantly weaker than predicted, with a decline to 34.9 in May, from 40.1 the previous month despite expectations of a modest recovery. There was a sharp decline in most components of the report and there was some renewed fears over the outlook.
The University of Michigan consumer confidence index continued to move high in the final May survey but it was unable to halt the Dollar's decline against all of the major currencies. In the Euro-zone, there were some internal tensions within the German coalition over the Opel support plan, while data releases were mixed, as German retail sales were slightly stronger than expected.
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