Market News

GBPEUR/GBPUSD

The Pound rallied the most against the Euro since the beginning of June yesterday, while the UK currency also surged towards $1.60 versus the U.S Dollar, after an index of retail sales rose to the highest level in five months. A report from the Confederation of British Industry showed that retailers are more optimistic this month, than at any stage since April.

The index of orders placed on suppliers also rose to the highest level since February last year and the survey yesterday adds to recent evidence that the UK economy may be emerging from the worst recession since the Second World War. Seperate reports yesterday showed that the economy contracted less than previously estimated in the second quarter, while mortgage applications stayed close to the yearly high.

Andy Clarke, chairman of the CBI distributive trades panel, said that “after such a difficult summer, it’s encouraging to see signs that conditions in the retail sector are stabilising. However, with unemployment rising, wage growth low and consumers building up their savings, spending is likely to remain subdued for some time.”

The Pound also made gains versus the majority of the 16-most actively traded currencies, after reaching another 12-year low against the Australian Dollar earlier in the session. According to a report from the Office of National Statistics, gross domestic product shrank just 0.6% in the three months through June, compared with a prior estimate of 0.7%.

The report yesterday added to recent suggestions that the beleagured UK economy is finally emerging from the recession, after five consecutive quarters of contraction. The Chancellor of the Exchequer Alistair Darling said on Monday that the recovery may be gathering momentum by the end of the year, and supported the government’s stimulus plan to purchase bonds.

UK gross domestic product slumped 2.5% in the first quarter, the most since 1958, and was revised lower from a 2.4% decline. The recession has now reduced GDP by 5.6%, while the widening UK debt position is also a grave concern for policy makers. The statistics office confirmed yesterday that the economy has contracted 5.5% from a year earlier, the most since records began in 1956.

The government have given assurances, as recently as last week, that current stimulus spending will be maintained until the recovery is secure. The Treasury plans to sell an extra £220 billion in debt this year and expects a deficit in 2010 of 12% of the economy. The Labour party fell to third place in the polls for the first time since 1982 in an opinion poll published yesterday.

The Bank of England’s chief economist Spencer Dale said last week that the economy has “turned a corner”, the UK faces a “slow and protracted” recovery from the recession, as unemployment continues to rise. The number of people out of work and seeing employment rose in the three months through July to 2.47 million, the highest level since 1995.

Lena Konileva, an economist at Tullett Prebon in London, said yesterday that “the fiscal stimulus is likely to subside from the middle of next year and it leaves a lot of uncertainty about the sustainability of growth momentum. The Bank of England may look to counterbalance the draconian tightening that’s in store from the next parliament.”

The Confederation of British Industry also reported yesterday that the UK economy will expand 0.3% in the third quarter and 0.4% in the last three months of the year. The Bank of England will start raising interest rates from the current record low of 0.5% in the first half of 2010, despite recent estimates that the Pound will fall towards parity with the Euro in the first quarter.

Neil Mellor, a currency strategist at BNY Mellon Corp, said that “the CBI report has underpinned Sterling’s leap. Retail sales were very good.” Investors just needed a good reason to stop selling the Pound and sales report yesterday provided the perfect platform for Sterling to bounce back against the Euro and the Dollar.

Elsewhere, the Pound also received a boost yesterday, after a report from the BoE showed that mortgage approvals increased again in August, as banks granted 52,317 loans to buy homes, close to the highest level since April 2008. The report follows recent data from Hometrack Plc, which showed that prices rose to the highest level this year in August.

The UK currency declined last week against 14 out of the 16 most actively traded currencies, after the Governor of the BoE Mervyn King said that it’s weakness was “very helpful” to the economic recovery. The Pound has fallen 2.9% against the Dollar since June 30th and a staggering 7% in value versus the Euro, after climbing 13% in the first half of the year.

Options trading showed yesterday that the odds of the Pound weakening to parity with the Euro by the end of March climbed to more than one in four, underlining growing speculation that the Bank of England favours a weaker currency. Therefore, why would investors encourage buying support for Sterling when it’s own Central Bank wants to drive it lower.

The Bank of England met with economists in London yesterday to discuss the much discussed asset-purchase plan. Policy makers expressed concerns that investors are exaggerating the significance of King’s comments last week that the Pound’s decline has been good for UK exports. The Central Bank also said that it has no plans to change its deposit rate soon and that policy makers are satisfied with the effects of the program on boosting money supply.

EUR/USD

The Dollar rose to the highest level in two weeks versus the Euro yesterday, breaching the $1.46 level, after Russia said that it will maintain the share of U.S Treasuries in its international currency reserves, reducing concerns that central banks will diversify away from the U.S currency. The Dollar also stood firm even as consumer confidence unexpectedly fell in September, after unemployment increased.

The Conference Board’s index of confidence dropped to a reading of 53.1, from a revised 54.5 in August. Unemployment is expected to rise to 10% this year, even as the pace of job losses slows and yesterday’s report correlates with a recent statement from the Federal Reserve that tighter credit conditions are curbing household spending.

U.S stocks fluctuated between gains and losses, as a separate report showed that home values in 20 metropolitan areas fell less than forecast in the year ending in July. The Fed may be once of the last major central banks to raise interest rates, putting the recovery of the Dollar at risk, as foreign investors will be reluctant to invest more in the U.S.

Data Released 30th September

U.K 00:01 Gfk Consumer Sentiment (September)

GER 09:00 Unemployment (September)

EU 10:00 Flash HICP (September)

U.S 13:15 ADP Employment Report (September)

U.S 13:30 Final GDP (Q2)

U.S 14:45 Chicago PMI (September)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound fell to the lowest level in six months against the Euro yesterday, dropping towards 1.0750 early in Europe, before a partial correction higher later in the day. The UK currency also dropped well below $1.60 versus the Dollar, consolidating its decline from last week, to the lowest level since July 8th at $1.5770.

The Pound is likely to test the next significant support level at 1.0526 versus the Euro over the coming weeks, amid speculation that the Bank of England is actively trying to weaken the currency, in order to help revive the UK economy. The Governor Mervyn King was quoted in the Newcastle Journal as saying that the Pound’s weakness was “helpful”.

According to the minutes released last week, BoE policy makers have said that there may be “false dawns” in the economic recovery and there is a growing concern over the financial position in the UK. Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi, said that “added to the negative Pound sentiment were the comments from King that the bank favours the weaker Pound, as a means to rebalance the economy.”

The Pound has weakened to the lowest level since April 1st and may continue to decline based on a form of technical analysis known as the Fibonacci sequence of numbers. The Monetary Policy Committee was unanimous in their decision to leave its asset purchase program on hold at £175 billion, but the Pound would need to break above 1.1270 versus the Euro to change the trend towards the upside.

The Bank of England embarked on the controversial quantitative easing policy in March, in an effort to reduce borrowing costs and kick start the economy that has been ravaged by the worst recession since the Second World War. King, who was outvoted in August for a bigger increase in the plan, was quoted as saying that “the banking sector is not in good shape and it will take a long time before the balance sheets of the banks are fully repaired.”

The minutes from the September policy meeting also showed that King changed his stance from the August announcement and elected for a no change in the plan. Lutz Karpowitz, a currency strategist at Commerzbank AG, said that “a currency which the country’s own central bank likes to see weak obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust.”

At the G-20 meeting last week, finance ministers around the world signaled that the economic recovery may not be robust enough to justify the withdrawal of fiscal stimulus measures. The Federal Reserve said on September 23rd that it has pushed back the end date of its asset purchase program to March from December and kept the benchmark interest rate at a record low.

Bank of England policy maker Kate Barker said on the same day that that a hurried increase in borrowing costs could deter banks from lending and hamper the economic revival. According to analysts at BNP Paribas SA, the Pound may fall towards $1.54 by the end of the year, should the Bank of England maintain the current stance on the currency’s decline.

Ian Stannard, a currency analyst at BNP Paribas SA, wrote in a report last week that “the Bank of England appears unconcerned by the currency weakness at this stage. We maintain our bearish sterling view, expecting the currency to be the weakest among the majors.” Sterling has lost 7% in value against the Euro since mid June, after climbing 12% in the first half of the year.

BNP Paribas SA said last week that the Pound may reach parity with the Euro in the first quarter of 2010. Elsewhere, Citigroup Inc said on Friday that the UK currency may fall to the lowest level against the Norwegian Krone since 1977. In stark contrast, Goldman Sachs Group Inc said on September 22nd that investors should sell the Euro versus the Pound at 1.10.

In terms of economic data, the Pound failed to secure buying support yesterday, after UK house prices increased by the most in two years during September. Confidence in the UK property market improved and the average cost of a home in Britain rose 0.2% to £156,100. The increase is the biggest since June 2007 and has left house prices 5.6% lower than a year earlier.

The report adds to recent evidence that the property market may be starting to recover, after the credit crunch ended a decade long boom. There is still a risk that the recovery will falter, as unemployment continues to rise, while the fundamental lack of properties for sale on the market has also contributed to a rise in prices.

The Pound may find some support against the majors this morning with the final estimate of UK gross domestic product in the second quarter due for release. The report will probably confirm that growth remained unchanged from the preliminary estimate earlier in the year.

Elsewhere, UK mortgage application are expected to increase to 52,000 in August, indicating a return to growth in the third quarter. However, while the data appears to be in keeping with the theme of recovery, the Pound looks set to remain under pressure versus the Dollar and the Euro.

EUR/USD

The Dollar consolidated on recent gains made against the Euro on Monday, recording a high of $1.4597 in New York, despite the fundamental lack of U.S economic data to guide financial markets. The G-20 meetings towards the end of last week did not have a significant market impact on sentiment surrounding the currency marker.

The preliminary estimates of German consumer price inflation was slightly weaker-than-expected, with a 0.4% decline for September. The subdued prices data will maintain pressure for the ECB to maintain the current stimulus measures and that will undermine support for the Euro to some extent. Global risk appetite gradually improved through the course of the day with stocks rallying in Europe and the U.S, curbing further demand for the Dollar on defensive grounds.

The Euro was able to resist a further move lower, after the ECB President Jean-Claude Trichet stated that there was a gradual economic recovery, but that it was not yet time for an exit of the ultra loose monetary policies. Trichet was addressing the European Parliament and also said that it was very important to have a strong Dollar, which will reinforce speculation that officials are looking to contain the rate of losses on the U.S currency.

Data Released 29th September

U.K 09:30 Final GDP (Q2)

U.K 09:30 Mortgage Applications (August)

U.K 11:00 CBI Distributive Trades Balance (September)

EU 10:00 Business Climate (September)

EU 10:00 Economic Sentiment (September)

– Consumer/Industrial/Services

U.S 14:00 Case Shiller House Prices (July)

U.S 15:00 Consumer Confidence (September)

written by Adam Solomon

GBPEUR/GBPUSD

Following on from last week, the Pound declined heavily against the Euro, dropping to a low of 1.0880, the lowest level in more than five months, while the UK currency also dropped under $1.60 versus the U.S Dollar. A report on Thursday indicated that the Bank of England may be using the Pound’s weakness as a way to boost the economy.

The Governor of the Central Bank Mervyn King also made a statement, following speculation that the BoE will cut the rate it pays financial institutions on deposits. King said that the weakening Pound was “helpful” to the process of rebalancing the economy. The Prime Minister Gordon Brown declined to comment on the Pound’s decline, although he told reporters that he welcomes “all the factors that make for a stable economy”.

The Pound has declined nearly 7% against the Euro since June and appears to have been driven lower by the tone and language used in a number of statements from Bank of England policy makers. King also said in an interview yesterday that two British banks got within hours of a liquidity shortfall on October 6th 2008, the day the financial system came to the brink of meltdown.

Lutz Karpowitz, a currency analyst at Commerzbank, wrote in a report yesterday that “a currency, (the Pound) which the country’s own central bank like to see weak, obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust.”

The Pound fell 1.5% against the Euro on Thursday, the weakest level since April 3rd, and is likely to fall even further, after breaking through long-term trend support at 1.1270 earlier this month. The UK currency also fell after the Daily Telegraph reported that two policy makers called economists to a “crisis meeting” this week to discuss the Pound’s decline and the Bank’s quantitative easing policy.

Jeremy Stretch, a senior currency strategist at Rabobank International, said that “the press reports regarding the economists’ meeting next week could be indicating that issues such as the deposit rate cut are back on the table. The market is putting two and two together and seeing the plumbing or the pipes of the UK financial system are still a little gummed up.”

King told the UK Treasury select committee earlier this month that policy makers were considering cutting the rate paid to financial institutions on deposits, which is currently at 0.5%. The Bank of England may still loosen its policy stance further and begin with withdrawing excess liquidity from the UK financial system in the third quarter of 2010.

Elsewhere, the Pound also lost ground against the Dollar and plummeted to a fresh 12-year low versus the Australian Dollar, after UK stocks declined on the week. Reports in the U.S showed that existing home sales unexpectedly fell in August, while the Federal Reserve said that it will cut the size of two programs designed to bolster credit markets.

According to the latest estimates from Commerzbank AG, the Pound may weaken to 1.0630 versus the Euro by the end of the year, after King’s comments increased speculation that the BoE is actively trying to weaken the Pound. The UK currency may fall further this week, especially if global stocks continue to fall, with a move towards 1.0526 versus the Euro a possibility.

The minutes from the Bank’s last policy meeting were also released last week, where policy makers voted unanimously to keep bond purchases on hold in September. In a dramatic u-turn, the governor of the Bank of England Mervyn King agreed to support the majority of the MPC, despite his recommendation for a more aggressive increase in August. King and David Miles both switched sides and joined the unanimous vote for no change in the plan, arguing that cohesion was better for the time being, even though a higher amount may be warranted.

King and Miles has sought as much as £200 billion at the August decision but all nine policy makers opted to keep the benchmark interest rate unchanged at a record low of 0.5%. The Confederation of British Industry have raised its forecast for economic growth in the third quarter and predicted that the Central Bank may cap its program at the current level, after buying the allocation of newly created money.

The language used in the minutes, however, did suggest that a further extension in the asset purchase program may be justified in the future. Policy makers adjudged that “in the absence of significant news about the medium term, the case for adjusting the program now was outweighed by the benefits of following through with the program.”

The Pound also fell on Friday, as world leaders at the G-20 meeting united behind a plan to regulate banker pay and tighten capital regulations for financial institutions. The UK currency dropped below $1.60 for the first time since July 8th, after U.S officials said Group of 20 leaders are closer to a “broad agreement” on a plan to tie compensation more closely to risk.

The UK currency dropped by the most since April against the Dollar on Thursday, following comments from the Bank of England that the Pound’s depreciation is ‘helpful’. Steven Barrow, head of G-10 currency research at Standard Bank Plc, said that “sentiment is pretty poor for Sterling. It comes down to what King was saying, at the G-20, there are issues of bonuses and bank capital.”

The Pound also declined after reports in the U.S on Friday showed that durable goods orders unexpectedly fell in August, signaling that companies are curbing spending and the economic recovery may falter. In terms of economic data, the focus this week will fall on September’s manufacturing index, while mortgage approvals and house prices are expected to show further signs of improvement.

EUR/USD

The Dollar advanced against the Euro last week, after an unexpected drop in U.S existing home sales reduced demand for higher-yielding assets, as investors maintained a mood of caution, following the FOMC announcement. Purchases dropped 2.7% to a 5.1 million annual rate, the second highest level in the last 23-months.

The Dollar gained 0.2% against the Euro on Thursday, rallying to a high of $1.4713, and the U.S currency may continue to strengthen in the near-time, as global stocks decline, after the Fed said that it will extend the end date of its $1.45 trillion purchases of mortgage backed securities to March from December.

The Euro was largely susceptible to risk sentiment and failed to secure buying support, even after German business confidence rose to a 12-month high in September. The Ifo index indicated that Europe’s largest economy will gather momentum over the coming months, after suffering the worst recession since the Second World War.

The Euro may fall to a two week low against the Dollar by the end of this week, as the single currency looks poised for a sustained downtrend, after having risen to $1.4844 last week. Fibonacci analysis, based on the theory that prices will rise and fall by certain percentages after reaching a high or a low, suggests that the Euro may drop towards $1.4500.

Data Released 28th September

U.K 11:00 Land Registry House Prices (August)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound declined heavily against the Euro yesterday, dropping to a low of 1.0940, the lowest level in more than five months, while the UK currency also dropped towards $1.60 versus the U.S Dollar. A report indicated that the Bank of England may using the Pound’s weakness as a way to boost the economy.

The Governor of the Central Bank Mervyn King also made a statement, following speculation that the BoE will cut the rate it pays financial institutions on deposits. King said that the weakening Pound was “helpful” to the process of rebalancing the economy. The Prime Minister Gordon Brown declined to comment on the Pound’s decline, although he told reporters that he welcomes “all the factors that make for a stable economy”.

The Pound has declined nearly 7% against the Euro since June and appears to have been driven lower by the tone and language used in a number of statements from Bank of England policy makers. King also said in an interview yesterday that two British banks got within hours of a liquidity shortfall on October 6th 2008, the day the financial system came to the brink of meltdown.

In a broadcast with the BBC, King said that “two of our major banks which had had difficulty in obtaining funding could raise money for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day.”

King would have been referring to Royal Bank of Scotland Plc and HBOS Plc, who were both taken under government control. The Prime Minister pledged to invest about £50 billion into the banking system on October 8th last year, to save it from collapse in the aftermath of Lehman Brothers Holdings Inc’s bankruptcy in September.

Lutz Karpowitz, a currency analyst at Commerzbank, wrote in a report yesterday that “a currency, (the Pound) which the country’s own central bank like to see weak, obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust.”

The Pound fell 1.5% against the Euro yesterday, the weakest level since April 3rd, and is likely to fall further, after breaking through long-term trend support at 1.1270 earlier this month. The UK currency also fell after the Daily Telegraph reported that two policy makers called economists to a “crisis meeting” next week to discuss the Pound’s decline and the Bank’s quantitative easing policy.

Jeremy Stretch, a senior currency strategist at Rabobank International, said that “the press reports regarding the economists’ meeting next week could be indicating that issues such as the deposit rate cut are back on the table. The market is putting two and two together and seeing the plumbing or the pipes of the UK financial system are still a little gummed up.”

King told the UK Treasury select committee last week that policy makers were considering cutting the rate paid to financial institutions on deposits, which is currently at 0.5%. The Bank of England may still loosen its policy stance further and begin with withdrawing excess liquidity from the UK financial system in the third quarter of 2010.

Brian Kim, a currency strategist at UBS AG, said yesterday that “our economists continue to expect a £25 billion increase as part of a phased easing in the quantitative easing program. The committee in our view believes the risks to policy makers are very much asymmetric and will therefore remain in a ‘give-growth-a-chance’ mode.”

Elsewhere, the Pound also lost ground against the Dollar and plummeted to a fresh 12-year low versus the Australian Dollar, after UK stocks declined for a second successive day in London. Reports in the U.S showed that existing home sales unexpectedly fell in August, while the Federal Reserve said that it will cut the size of two programs designed to bolster credit markets.

According to the latest estimates from Commerzbank AG, the Pound may weaken to 1.0630 versus the Euro by the end of the year, after King’s comments increased speculation that the BoE is actively trying to weaken the Pound. The UK currency may fall further today, especially if global stocks continue to fall, with a breach below $1.60 versus the Dollar a possibility.

EUR/USD

The Dollar advanced against the Euro yesterday for the second day in succession, after an unexpected drop in U.S existing home sales reduced demand for higher-yielding assets, as investors maintained an mood of caution. Purchases dropped 2.7% to a 5.1 million annual rate, the second highest level in the last 23-months.

The rising unemployment rate means that more Americans may lose their homes, swelling the amount of unsold properties saturating the market. Nevertheless, the housing recession that crippled the economy is easing, as foreclosure-driven price declines, tax credits and near record low borrowing costs have helped stabilise demand over recent months.

The Dollar gained a further 0.2% against the Euro in New York, rallying to a high of $1.4713, and the U.S currency may continue to strengthen in the near-time, as global stocks decline following the FOMC announcement on Tuesday. The Fed said that it will extend the end date of its $1.45 trillion purchases of mortgage backed securities to March from December.

The Euro was largely susceptible to risk sentiment and failed to secure buying support, even after German business confidence rose to a 12-month high in September. The Ifo index indicated that Europe’s largest economy will gather momentum over the coming months, after suffering the worst recession since the Second World War.

Data Released 25th September

EU 09:00 M3 (August)

– 3 Month Moving Average

U.S 13:30 Durable Goods (August)

U.S 14:55 Michigan Sentiment (Sept – Final)

U.S 15:00 New Home Sales (August)

written by Adam Solomon