by Adam Solomon
Sterling / Euro and US Dollar
The Pound made significant gains against a basket of currencies yesterday, rising through $1.56 against the Dollar to the highest level in five-months, while the UK currency also re-visited the resistance level at 1.20 versus the Euro. The Australian Dollar has declined heavily against the Pound and U.S Dollar, after the latest inflationary data showed that consumer prices fell short of initial expectations in June, reducing the prospect of an Australian interest rate hike next week.
The UK currency has risen sharply against all of the 16 most actively traded currencies, particularly the U.S Dollar, after a report in the U.S yesterday showed that consumer confidence declined to the lowest level in five months in June. The Pound is also benefiting from the improvement in risk sentiment, as stocks and commodities continue to rally, reducing the appeal of the Japanese Yen and the U.S Dollar as a refuge.
The Bank of England governor Mervyn King was speaking earlier yesterday and emphasised the need for caution on the economic recovery, saying that there may be a “considerable” way to go before UK monetary policy returns to normal. Policy makers have adopted an ultra loose policy stance, even as inflation exceeds the government’s upper 3% limit.
King said in a testimony to lawmakers that “there will come a point when we will certainly need to ease off the accelerator and return bank rate to more normal levels. I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word normal.”
Only Andrew Sentance has stepped out of line and recommended a rate increase over the past two months, with officials concerned about how the government’s spending cuts will impact on the broader economy. David Mile told the Monetary Policy Committee that the central bank should be prepared to step up its bond purchasing program to protect the economic recovery. King’s comments yesterday have done little to dampen Sterling sentiment, as the Pound continues to make strong gains and challenge resistance levels upwards of 1.20 versus the Euro.
The National Institute of Economic and Social Research said in a report earlier this week that the improvement in UK gross domestic product in the second quarter was a “blip” and may not be sustained for the remainder of the year, as the government embarks on the steepest public spending cuts in the post-war era.
The UK currency is likely to continue its upward momentum against the U.S Dollar in the short-term, amid concerns of a double dip recession and increased fears over the state of the property and labour market. On technical grounds, the Pound’s ability to hold above the 200-day moving average was also an important element, with a challenge on technical levels above $1.5620 before a limited correction.
The Pound has declined moderately this morning, after a report from the Nationwide Building Society showed that UK house prices fell in July for the first time in five months, as tighter lending conditions and government cuts slow the economy and deter first-time buyers. The average cost of a home in the UK fell 0.5% from June, but prices are still up 6.6% from this stage last year.
Euro / US Dollar
The Euro rose against the U.S Dollar and Japanese Yen yesterday, as improving risk appetite pushed global equity markets higher and reduced demand for the perceived safe haven assets. The single currency was close to its strongest level against the Dollar in two months, as the MSCI World Index rose for the fifth straight day.
Greg Gibbs, a currency strategist at RBS, said yesterday that reports including last week’s German consumer confidence data and credit growth “continue to show surprising strength”. However, the ECB reported yesterday that there had been a further tightening of credit conditions during the second quarter and this will ease some concern over the financial sector.
The U.S durable goods orders data was weaker-than-expected with the headline figure dropping 1% on the month for June. The Fed’s Beige Book was also mixed, as some districts reported improved conditions, but credit conditions remained generally tight and commercial real estate remained weak. The Euro has found it difficult to sustain its momentum above the $1.30 level, as the Dollar nudged higher towards the close of trading last night.
Data Released July 29th
U.K 07:00 – Nationwide House Prices (July)
U.K 09:30 – Consumer Credit (June)
U.K 09:30 – Mortgage Applications (June)
GER 09:00 – Unemployment (July)
EU 10:00 – Business Climate (July)
EU 10:00 – Economic Sentiment (July) – Consumer / Industrial / Services
U.S 13:30 – Initial Jobless Claims (w/e 24th July)
