GBPEUR/GBPUSD
The Pound advanced to the strongest level against the Euro since August yesterday, while the UK currency also made gains versus the majority of the 16 most actively traded currencies, as stock markets rallied worldwide following a statement from the U.S Federal Reserve. Officials have admitted for the first time that the U.S economy is in recovery, reviving demand for higher-yielding assets.
The UK currency also strengthened against the Euro, as concerns over Greece’s national debt escalated, spurring speculation that the European Union will need to intervene. The MSCI World Index of shares bounced back from a six-day decline, the longest stretch of losses in almost a year. The FOMC also upgraded its economic outlook on Wednesday evening, and reiterated that it will end liquidity backstops and scale back emergency stimulus measures.
Derek Halpenny, European head of foreign exchange strategy at the Bank of Tokyo Mitsubishi UFJ, said that “broader global market developments are supportive of the Pound today. Investors conclude that better global conditions mean more profitable financial institutions.” The Pound rallied a further 0.6% against the Euro yesterday and 0.5% versus the Dollar to a high of $1.6250.
UK government bonds were driven lower yesterday, following an article in the Financial Times. Robert Stheeman, who runs the nation’s Debt Management Office, said that it will be more difficult to sell gilts without the Bank of England buying securities. The central bank completed its £200 billion quantitative easing program earlier this week and will decide whether to extend the policy at its next meeting on February 4th.
Speculation surrounding additional fiscal stimulus measures coupled with the widening budget deficit may curtail the Pound’s momentum over the coming weeks but the Chancellor Alistair Darling rejected criticism yesterday, saying that he would halve the deficit in four years. During an interview, he said that “we have the fastest defect reduction plan of major economies.”
A government report released earlier this week showed that the UK economy only limped out of the recession in the fourth quarter and some dovish member of the MPC, including Kate Barker, believe that the recovery will be slow and protracted. Ian Williams, chief executive officer of gilt fund Charteris Portfolio Managers, said that “the UK will have very anemic growth of less than 1% for the next three or four years. We place a 40% probability on the UK falling back into recession and further cuts in interest rates.”
The Pound erased gains made against the Dollar yesterday afternoon, while the UK currency also fell from its week against the Euro, after the credit rating agency Standard & Poor’s said that it doesn’t view the UK “among the most stable and low-risk banking systems globally.” The damning assessment of the banking sector left Sterling reeling, falling towards $1.6170 at the close of trading last night.
S&P; highlighted “the country’s weak economic environment, the reputational damage we believe has been experience by the banking industry, and what we see as the high dependence of state support.” Following the Pound slide last night and the recent GDP numbers, Euro and Dollar buyers may wish to consider the benefits of a stop order to protect against a sharp move lower.
The Pound has remained resilient to poor economic data recently and according to MIG Bank SA the UK currency may strengthen even more against the Euro. Paul Day, chief market analyst at MIG, said that “the single European currency might initially depreciate to 1.2240, the 50% Fibonacci retracement of the 2007 – 2008 euro.”
EUR/USD
The Euro declined to a six-month low against the Dollar yesterday, as the scale Greece’s and Portugal deficit’s encouraged investors to seek the relative security of dollar denominated assets. The single currency fell against the majority of the 16 most actively traded currencies, as the cost to insure Greece’s sovereign debt rose to a record level.
German and French government denied a report in the press that European Union member nations are examining ways to provide financial assistance. Amelia Bourdeau, a currency strategist at UBS AG, said that “there’s definitely fear of systemic risk with the euro-zone right now. We keep seeing more sovereign risk headlines about Greece and Portugal. That pushes the euro lower.”
Elsewhere, European confidence in the economic outlook improved for a tenth consecutive month in January, as reviving global demand helped push up exports and boosted earnings. An index of executive and consumer sentiment increased to 95.7, from a revised 94.1 in December. A separate report showed that German unemployment rose for the time in seven months, indicating that the recovery is losing momentum.
Data Released 29th January
EU 09:00 M3 (December) – 3 Mth Moving Average
EU 10:00 Flash HICP (January)
EU 10:00 Unemployment (December)
U.S 13:30 Advance GDP (Q4)
U.S 14:45 Chicago PMI (January)
U.S 14:55 Michigan Sentiment (January – Final)
written by Adam Solomon
Related posts:
- FX171 Foreign Exchange Daily Insight – The Pound slips as the economy grows less than expected
- FX160 Foreign Exchange Daily Insight – The Dollar rallies amid concerns over the economic recovery
- FX158 Foreign Exchange Daily Insight – The Pound rallies against the majors, after house prices increased in January
- FX151 Foreign Exchange Daily Insight – The Euro declines heavily after Trichet’s statement
- FX135 Foreign Exchange Daily Insight – The Pound declines against the majors for a second day
