by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied to a fresh five-month high against the U.S Dollar this morning, while the UK currency also made strong gains versus the majority of the 16 most actively traded currencies. Sterling hit a high of 1.5575 in London, as global risk appetite continues to improve, diminishing the allure of the U.S Dollar as a safe haven asset.
Concerns over the U.S economic outlook also dominates, amid fears of a double-dip recession, as the economic data points to a slowing housing market and rising unemployment. UK stocks have risen for a second successive day, buoyed by a rally in banking shares, as Barclays Plc rose 5%. The benchmark FTSE 100 Index was up 0.8% by midday, while crude oil prices also hit an 11-week high, after analysts at Goldman Sachs said that the price was too cheap.
Risk appetite continued to improve, after the Basel Committee on Banking Supervision relaxed some of its tougher proposals on capital and liquidity rules. Barclays Plc and Lloyds Banking Group Plc led the rally in banking shares, as the Committee allowed certain assets, including minority stakes in other financial companies to count as capital.
The latest CBI retail sales data yesterday was much stronger-than-expected and this triggered a fresh surge in the Pound to the upper resistance levels above $1.55 against the Dollar. The survey recorded a strong figure for July and retailers were also optimistic over the outlook for August. Although distorted to some extent by methodology changes, the survey was a four-year high and the Pound was able to continue its upward momentum.
The Pound also recovered earlier losses against the resurgent Euro, rising towards 1.1960 in London, despite a lack of any key economic data released in the UK or the Euro-zone. The corrective recovery appears more technical than fundamental, but Euro buyers are advised to be cautious, as the single currency broke through $1.30 against the U.S Dollar this morning. The performance of the single currency versus the greenback seems to be dictating GBP/EUR in recent days and buyers would be well placed to utilise a stop order to protect against a further downward move.
The UK currency remained broadly resilient towards the close of trading last night, despite a report from the National Institute of Economic and Social Research, which showed that the pace of UK second quarter economic growth was a “blip” and that the Bank of England should continue to maintain emergency stimulus measures.
The preliminary estimate of UK gross domestic product in the three months to June showed that the economy expanded 1.1%, the fastest pace in four years. The result of the data far exceeded initial expectations and presents a difficult challenge to policy makers, who must decide if the economy faces a greater threat from inflation or need additional stimulus, as the government implements the deepest spending cuts in the post-war era.
Simon Kirby, NIESR economist, told reporters yesterday “I don’t think that growth rate will be sustained. Far from that, I think the growth rate will fall back somewhat quite sharply.” Bank of England policy maker Andrew Sentance this month repeated his recommendation to begin raising interest rates, citing “resilient” inflationary pressures.
Euro / US Dollar
The Euro maintained a strong tone against the Dollar in early European trading yesterday, rising above the coveted $1.30 level against the U.S Dollar. European economic data again provided support, with German consumer confidence rising to 3.9 in July, from a revised 3.6 in June. There was also an annual increase in Euro-zone money supply for the first time since January.
Risk appetite also remained firm and helped push the Euro to the highest level in 11-weeks against the Dollar. The U.S housing data was slightly stronger-than-expected with the Case/Shiller house price index recording a 4.6% increase in the year to May. However, a separate report showed that U.S consumer confidence fell below forecasts in July, as mounting concern over job losses and earnings threatens to curtail the recovery.
Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, said that “faith in the economic recovery is failing. It’ll be 2013 before we see any semblance of normality in the labour market. It means weaker purchases.” There was some weakening in risk appetite following the data, which provided some initial Dollar support. amid a retreat in high-yield and commodity currencies.
Data Released July 28th
U.K 11:00 – Land Registry Home Prices (June)
U.S 13:30 – Durable Goods (June)
U.S 19:00 – Federal Reserve Beige Book Published