Market News

GBPEUR/GBPUSD

The Pound rallied strongly against the U.S Dollar yesterday, reaching a high of $1.6600 in London, while the UK currency also rose for a fourth straight day versus the Euro, briefly touching upon 1.1200. A report from the Bank of England showed that UK mortgage approvals increased more than initial estimates in September.

Banks and lenders granted 56,125 home loans, compared with 52,970 in August, as approvals climbed to the highest level in 18 months and added to signs that the housing market is stabilising. Bank of England policy makers will decide next week whether to expand the £175 billion asset-purchase program of buying government debt to bolster the economy.

The third quarter GDP figures showed that the UK economy remains entrenched in the worst recession on record, after contracting for six consecutive quarters and economists have warned that the housing revival may come under scrutiny if job losses mount. James Knightly, an economist at ING Financial Markets, said “it will be a very tight decision for the Bank of England. The fact that gross domestic product is still negative will make it pretty difficult for them to do anything other than expand quantitative easing.”

The Pound has rallied furiously against the majors in spite of the GDP numbers last week, amid speculation that the third quarter growth figures will be revised higher. The Pound extended gains made against the Dollar yesterday and traded above $1.65, after the opening of the U.S trading session. Recent reports have indicated that housing is recovering, after falling as much as a fifth from their peak in 2007.

Former Bank of England policy maker David Blanchflower said on October 26th that house prices may fall next year, leaving as many as 3 million people with homes worth less than the mortgages used to buy them. Monthly mortgage approvals are still only half what they were in September 2007, prior to when the credit crisis began.

Consumer spending may also be slow to recover as Britons choose to reduce their 1.46 trillion of debts built up during a decade long economic boom. Spending, which accounts for roughly two thirds of the economy, declined in September, while consumer credit also fell for a third straight month. The data released yesterday suggests that the Bank of England’s efforts to unlock credit markets may be beginning to work.

Economists are divided over whether the Monetary Policy Committee should expand its bond-purchasing program on November 5th, after the economy contracted 0.4% between July and September. The gain in Sterling yesterday propelled the UK currency to its first monthly advance versus the Dollar since July.

The Pound also rallied against the Dollar, as data released in the U.S yesterday showed that the economy returned to growth in the third quarter. U.S gross domestic product expanded 3.5% from July to September, the first expansion in more than a year, and surpassed the 3.2% forecast. Henrik Gullberg, a strategist at Deutsche Bank AG, said that “if we get strong data, be that in the UK or globally, it’s a good thing for Sterling.”

The UK currency was also poised to break three consecutive months of declines versus the Euro, even after last week’s GDP report from the Office of National Statistics. The Pound advanced 0.5% against the Euro yesterday and may encounter strong resistance between 1.1200-1.1270. Gullberg also said yesterday that “the market overreacted to the weak GDP numbers in the UK, What we have seen since is the market has moderated its bearish opinion.”

The Pound lost some ground against the higher-yielding currencies, as the stronger-than-expected U.S data helped encourage investors back to riskier assets. UK stocks advanced 0.4% in London, after the report reignited expectations that a seven month rally is justified by the earnings outlook. The focus will soon switch to the BoE rate announcement and it will interesting to see whether the Pound can hold on to the recent gains made against both the Euro and the Dollar.

EUR/USD

The Dollar and the Japanese Yen declined against most of the 16 most actively traded currencies yesterday, after the U.S economy returned to growth in the third quarter and encouraged investors away from the so-called “safe haven” assets. The U.S currency dropped against the Euro for the first time in five days, as stocks and commodities rallied worldwide.

Michael Woolfolk, a senior currency strategist at New York Mellon Corp, said “risk is back on. It should be positive for the stock market and negative for the Dollar.” The Dollar declined 0.6% against the Euro in New York, despite comments from European Central Bank member Axel Weber, that the Bank may start to withdraw its emergency stimulus measures next year.

U.S policy makers will now focus on whether the recovery, supported by Federal assistance to the housing and auto industries, can be sustained into 2010 and revive the labour market. The record $1.4 trillion budget deficit limits President Obama’s options more more emergency stimulus, while Fed officials try to convince investors that the Central Bank will exit emergency programs.

Data Released 30th October

U.K 00.01 Gfk Consumer Confidence Survey

EU 10:00 Flash HICP (October)

EU 10:00 Unemployment (September)

U.S 12:30 Employment Cost Index (Q3)

U.S 12:30 Personal Income / Consumption (September)

– Core PCE

U.S 13:45 Chicago PMI (October)

U.S 13:55 Michigan Sentiment (October Final)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound weakened slightly against the Dollar yesterday, but the UK currency made impressive gains versus the higher-yielding currencies like the Australian Dollar and South African Rand, as stocks slumped for a seventh consecutive day. Commodities also declined as global risk appetite waned and the MSCI World Index dropped 0.6%.

Sterling maintained its advance against the Euro for a third straight day, rising above 1.11 in London, after declining 1.9% following the GDP report last week. The FTSE 100 Index slid 1.5%, as reports from a number of financial institutions disappointed investors, and speculation increased that regulators may force banks to break up to strengthen balance sheets.

The FTSE 100 has retreated to a three-week low this week, as concern increases the seven month rally may have taken share prices too high relative to prospects for earnings growth. The gauge is still up 46% from this year’s low on March 3rd and the global decline in risk appetite has encouraged investors to seek the security of safe haven assets in favour of low cost loans in Japan.

Copper dropped for a third straight day, while oil and gold prices also declined. Peter Frank, a currency strategist at Societe Generale SA, said that “we’ve had a bit of risk aversion in equity markets. The Pound isn’t looking as if it could outperform the Dollar or the Yen in a risk averse situation.” The Pound fell 0.2% against the Dollar yesterday to $1.6330 in London.

The increase in risk aversion helped Sterling appreciate over 2% against the Australian Dollar to 1.8220 and almost 3% in value versus the South African Rand. Sean Maloney, a fixed-income strategist at Nomura International Plc in London, said yesterday that “we’ve had a move upwards in all the markets and perhaps we’re taking a bit of stock ahead of the supply we’ve got coming up in the five-year auction in the U.S.”

The Bank of England’s Monetary Policy Committee will decide on November 5th whether to extend the £175 billion bond purchasing plan, as the UK economy languishes in the worst recession on record. Frank at Societe Generale SA, said “that really is the key to whether the Pound is going to rally or not. The leading indicators are beginning to turn up.”

Governments and Central Banks around the world are preparing to remove stimulus measures, after spending a total of $12 trillion, by International Monetary Fund estimates, to drag the global economy out of recession. Separately, the Land Registry said on its website yesterday that UK house prices rose 0.9% in September.

The Pound has risen sharply against the Euro this week and it will be interesting to gauge whether the UK currency can sustain this momentum going into next week. The rate announcement on November 5th is shaping up to be hugely significant in determining Sterling sentiment over the coming months, Euro and Dollar buyers may wish take advantage of the current rate or at least place a stop order.

EUR/USD

The Dollar and the Japanese Yen gained against most of the 16-most actively traded currencies, amid speculation that an unexpected decrease in U.S new home sales dampened demand for higher-yielding assets. Sales of new homes decreased 3.6% to a 402,000 annual pace, lower than preliminary estimates, a sign that the housing recovery may lose its momentum.

The Dollar has posted its longest rally against the Euro since mid August, rising for a fourth consecutive day, on evidence that housing is declining and mortgage applications fell 12% to a two month low. Global investors have much less tolerance for riskier assets than they did before the global financial crisis, and a sustained decline in the stock market is supporting Dollar sentiment.

The Australian Dollar declined against the U.S Dollar and the majority of the major currencies, following reports that inflation slowed in September. The fall in consumer prices will ease speculation that the Reserve Bank of Australia will speed up interest rate increases. The decline in stocks and commodities is also weighing on the Australian Dollar, as traders move away from riskier assets.

Data Released 29th October

U.K 09:30 Mortgage Applications

EU Economic Sentiment (October)

– Industrial / Consumer / Services

GER 09:00 Unemployment (October)

U.S 12:30 Advanced GDP (Q3)

– Deflator

U.S 12:30 Initial Jobless Claims (w/e 24th October)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound rallied for a second day against the Dollar yesterday, rising to a high of $1.6436 in London, while the UK currency also consolidated on recent gains made against the Euro. The Confederation of British Industry reported that UK retail sales climbed to the highest level in almost two years in October, with retailers the most optimistic since December 2007.

Retailers saying that sales increased from a year earlier outnumbered those reporting declines by 8 percentage points, up from 3 points in September. The buoyant tone of the report follows data released yesterday that showed business confidence rose to the highest level in 18-months and the Bank of England must decide whether it is necessary to inject additional stimulus measures.

Steven Barrow, head of Group of 10 research at Standard Bank Plc, said yesterday that “if the market is broadly positioned for an extension of quantitative easing, the risk of a big move is more of a rally in sterling if it doesn’t happen” The Pound’s back-to-back gain against the Euro was the first in more than a week and the resilience in Sterling following the GDP data last week is causing many economists to believe that the figures will be revised higher over the coming months.

Bank of England policy maker Adam Posen was speaking this week and said that there are tentative signs of an economic recovery in Britain, despite reports of an unexpected third-quarter contraction. Jeremy Stretch, a senior currency strategist at Rabobank International said that the CBI data and Posen comments “add another element of doubt in the validity of the third quarter numbers last week. Maybe it’s a case that they will wait and see on quantitative easing.”

The Pound advanced against 11 out of the 16 most actively traded currencies, rising up to 0.6% against both the Dollar and the Euro, prior to a report in the U.S showed that consumer confidence unexpectedly fell this month. The UK currency also gaining momentum on speculation that the Bank of England will be amongst the first central banks to begin raising interest rates.

Easing credit market conditions and a revival in global demand suggests that the UK is emerging from the recession quicker than the GDP numbers indicate. However, according to Posen, officials should maintain the current stimulus programs in order to cement the recovery and the MPC will probably extend quantitative easing next month.

Posen said on Monday that the 0.4% drop in gross domestic product in the third quarter doesn’t imply anything for the forecasts, that policy makers produce for the November 5th decision. There’s evidence of a sustained economic recovery, even if Britain is lagging behind other countries, such as Germany and France, in pulling out of the recession.

The Pound suffered its biggest drop since March on Friday 23rd October, after the GDP numbers increased speculation that policy makers would extend the bond purchasing program beyond the current £175 billion. According to the Taylor Rule, the UK currency’s declines over the past quarter has left it 22% undervalued on a purchasing power parity basis.

Stephen Gallo, head of market analysis at Schneider Foreign Exchange, said that a weaker currency may help Britain emerge from the recession. “A country like the UK that needs to rebalance towards net exports can do with a modest but stable devaluation of Sterling.” Analysts at Commerzbank AG speculate that the Pound will weaken to 1.0600 versus the Euro over the coming weeks.

EUR/USD

The lower-yielding currencies rallied against most of their major counterparts yesterday, as the Dollar advanced versus the Euro for a third straight day in the longest stretch of gains since August. U.S consumer confidence fell this month, reducing the demand for higher-yielding assets, as traders sought the relative security of Dollar denominated assets.

The Dollar appreciated 0.5% to $1.4804 in New York , amid concerns that global growth will fail to justify the valuations assigned to stocks and commodities. The rally in such securities is probably at its peak and recent data indicates that U.S economic growth is still lagging behind historical averages.

Vassili Serebriakov, a strategist at Wells Fargo & Co, said that “consumer confidence is weak. There’s to an extent a disconnect between what financial markets are telling us and what the economic data is telling us.” The Conference Board’s consumer confidence index dropped to a reading of 47.7 in October, from a revised 53.4 in the previous month.

Data Released 28th October

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

EU 09:00 ECB Bank Lending Survey Published

U.S 12:30 Durable Goods Orders (September)

U.S 14:00 New Home Sales (September)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound rallied against the Dollar and the Euro yesterday, amid speculation that the UK currency’s decline on Friday was exaggerated, given the prospects for an economic recovery. The Pound rebounded from a low of $1.6254 against the U.S Dollar, after earlier extending its drop of 1.9%, the biggest decline since March 9th.

Economist at Goldman Sachs Group Inc Ben Broadbent and Kevin Daly said that last week’s report from the Office of National Statistics, showing that the economy unexpectedly shrank in the third quarter, may be “revised significantly higher in time.” The Pound is currently trading at the weakest level against the Euro in a decade and is making UK products less expensive and turning Goldman Sachs Group inc into Sterling bulls.

Purchasing power parity, a measure of the relative cost of goods, shows that the UK currency is 22% below where it should be. Sterling hasn’t been so cheap since 1999, after the Bank of England flooded the economy this year with £175 billion buying government and corporate bonds. The move was intended to keep borrowing costs from rising, as the economy shrinks, and policy makers may well increase that amount in the November 5th meeting.

UK assets have been dramatically discounted, as the seizure in global credit markets drove the economy into its worst recession since the Second World War. The government was forced to take stakes in two of the country’s biggest banks, to save them from bankruptcy and the Labour Party currently trails the Conservatives by 17 percentage points.

The government report last week showed that UK gross domestic product surprisingly shrank 0.4% in the three months through September, continuing the longest contraction of six consecutive quarters, since records began in 1955. Nevertheless, the Pound rallied 0.4% against the Dollar yesterday to a high of 1.6670 in London and 1% versus the Euro, as concerns grow over the impact of a strong Euro on exports in the region.

The Pound may struggle to hold on to yesterday’s gains, as speculation mounts that the Bank of England will extend the quantitative easing program in November and pump more money into the economy to revive growth. The Pound’s slide is fueling mergers and acquisitions in the UK, bringing the first net inflows to the country in three years. The last time that happened in 2006, the Pound jumped 2.1% versus the Euro and 13% against the Dollar, the biggest gain in 16-years.

Goldman Sachs predicted this month that Sterling will appreciate 9% versus the Euro to 1.1905 and by 14% to $1.85 against the Dollar, even as UK debt quintuples as a percentage of gross domestic product. According to Deutshce Bank AG, investors underestimate the risk that the BoE will increase interest rates from the current record low of 0.5%.

According to study by analysts on the Taylor Rule, an economics equation for predicting central bank moves based on policy makers’ tolerance for inflation and unemployment, rates should be about 2.75 percentage points higher than the current level. However, futures contracts predict less than a quarter percent increase by April 2010, the biggest disparity among the Group of 10 economies.

Henrik Gullberg, a strategist at Deutsche Bank, said that “the Bank of England is the most out of line among the G-10 nation in terms of policy.” The rate is likely to rise to 1.25% by the end of 2010, with increases starting in the second quarter. The ECB and the Federal Reserve probably won’t alter borrowing costs until at least the third quarter.

Elsewhere yesterday, the Pound also received a boost as UK business confidence rose to the highest level in 18-months. According to a report from KPMG, nineteen percent of executives say that the outlook for business is “good” or “very good”, up from 9% in the previous quarter. Consumer prices are also poised to rise faster than any other developed economy, as the inflation rate holds steady at 2.1% this year.

The Pound fell 4.4% against the Dollar in August and September, the largest two month decline this year, amid suggestions that the Bank of England favour a weaker currency and expanding the asset purchase program. The UK currency also lost 6.9% against the Euro, prompting Citigroup Inc and BNP Paribas SA to predict Sterling would reach parity with the Euro by the first quarter of 2010.

The UK budget deficit will swell to £175 billion in the year ending March 2010, roughly 12.4% of gross domestic product, the highest amongst the Group of 20 nations. The deficit was 77.3 billion in the first six months of the year, the largest for any half year period since records began in 1946. Peter Lucas, an investment strategist at RBC Wealth Management, said that “there might be scope for the Pound to rise in the near-term, but these underlying issues do require the Pound to be an undervalued currency for some time.”

A number of influential economists are seemingly turning bullish on Sterling with Goldman Sachs and JP Morgan Chase & Co advising clients to buy the Pound, as the market looks too bearish on the UK economy and way too short on Sterling. Barclays also predicts that the Pound will rise about 8% to $1.76 in March and 1.1764 versus the Euro.

EUR/USD

The Dollar advanced against the Euro yesterday, reversing a drop to the lowest level in 14-months, amid speculation that the Dollar’s decline beyond $1.50 will be difficult to sustain. The U.S currency also rose against a basket of currencies on bets that a drop in stocks would discourage investors from purchasing higher-yielding assets.

Vassili Serebriakov, a currency strategist at Wells Fargo & Co in New York, said that “at some point, the Euro will fall victim to its own success. We’ve seen the Euro touching new highs but really struggling to extend them significantly.” The Dollar advanced 0.7% to $1.4905 against the Euro, from $1.5008 at the close of trading on Friday.

The Dollar is also being buoyed by speculation that the Federal Reserve will divert away from ultra-loose policy and begin to tighten interest rates. Officials in the U.S are contemplating the best way to let the market know that a period of record low interest rates will draw to an end. The issue may be on the table when the FOMC meets in early November.

Data Released 27th October

U.K 11:00 CBI Distributive Trade Balance (October)

EU 09:00 M3 / 3 Month Moving Average (September)

U.S 13:00 Case Shiller House Prices (August)

U.S 14:00 Consumer Confidence (October)

written by Adam Solomon

GBPEUR/GBPUSD

Following on from last week, the Pound advanced to the highest level against the Dollar in more than a month on Tuesday, while 10-year gilts increased by the most since July 23rd. The minutes from the Bank of England’s last policy-setting meeting showed that all nine policy makers voted unanimously to keep the asset-purchase program unchanged.

However, the UK currency remains susceptible to downward pressures and declined against the majors on Thursday, after a report showed that UK retail sales unexpectedly stagnated for a second month in September. While investors scaled expectations that the Bank of England will pause its asset-purchase plan. The report from the Office of National Statistics showed that sales were unchanged from August, a sign that the economy is struggling to emerge from the recession.

Rising unemployment and tighter credit conditions are discouraging consumers’ from spending and reports last week signals that weakness in the economy is persisting at a time when policy makers are considering whether to increase quantitative easing from the current £175 billion. James Shugg, an economist at Westpac Banking Corp, said yesterday that “there will be retrenchment as households pay down debt. The economy still needs quite a lot of support. The BoE will extend the quantitative easing program in November.”

The Pound fell towards $1.6530 against the Dollar after the report, from $1.6630 earlier in the session, as food sales slipped 0.1%, while textile, clothing and shoe sales fell 0.5% on the month. J Sainsbury Plc, the UK’s third biggest supermarket, reported decelerating sales this month and said that revenue growth will become more difficult to achieve.

Rising unemployment is set to further hinder the economic recovery, while the number of people out work in the three months through August rose by the smallest amount in a year, the jobless rate, at 7.9%, is still the highest in more than a decade. The BoE governor Mervyn King and policy maker David Miles have pushed for a bigger expansion of bond purchases in August and still believe that the outlook for consumer prices is volatile.

The Pound dropped by the most in almost two weeks against the Dollar, after the Deputy Governor of the Central Bank Paul Tucker said that expanding so-called quantitative easing is “possible” if necessary. Ian Stannard, a foreign-exchange strategist at BNP Paribas SA, said that “the weaker retail sales reading is weighing on the Pound. There seems to be a desire to extend quantitative easing from certain BoE policy makers.”

The Pound declined heavily against all of the 16 most actively traded currencies on Friday, after a report from the Office of National Statistics unexpectedly showed that UK gross domestic product dropped in the third quarter. Enduring slumps in services, manufacturing and construction has kept the economy entrenched in the worst recession on record.

Gross domestic product dropped 0.4% from the previous quarter, despite widespread forecasts of 0.2% increase. The economy has now contracted in six consecutive quarters, the most since records began in 1955. The Chancellor of the Exchequer Alistair Darling said this week that he will focus on spurring economic growth, as he struggles to cement the recovery in time for the general election in June.

The data released this morning, the first of the third quarter from the Group of Seven nations, suggests that Britain may turn out to be the last major economy to exit the recession. The report will also spark speculation that the Bank of England will expand upon its quantitative easing program in November, a move that would curtail Sterling sentiment.

The Pound has plunged under 1.10 versus the Euro and fell by the most in six months versus the single currency in London. The Pound will probably fall further towards the support at 1.0750 and latterly 1.0680, as the report on third quarter GDP gave the Bank of England more impetus to keep enacting emergency measures to spur growth.

Seven months after policy makers embarked on an unprecedented policy to rescue the economy from the worst recession in a generation, the Office of National Statistics report that their efforts thus far have proved to be unsuccessful. Stephen King, chief global economist at HSBC Holdings Plc, said that “having pumped in so much money and still seeing a decline in GDP is damaging from a perspective of confidence and expectations for recovery. They’ll be thinking very hard about whether to extend quantitative easing. They need to do something to show they care about the economy.”

The UK economy is still mired in the worst recession since the Second World War, even after pledges of about one trillion pounds in stimulus and banking aid from the government and the Bank of England. Mervyn King, whose push to expand bond purchases to £200 billion in August was defeated, may win some support at the next announcement on November 5th.

The prolonged economic slump dashes hopes that the UK is poised to follow the U.S, Germany and France out of recession. In terms of economic data, the focus will fall on a report from the Confederation of British Industry, alongside the Nationwide and Housetrack data on the UK housing market. Consumer confidence is expected to climb, while the banking and house price data will be watched for any improvement.

The Pound will remain vulnerable this week, after the shocking news that the UK economy contracted 0.4% in the third quarter. As speculation builds ahead of the November meeting, investors will be paying close attention to comments from the BoE’s Posen and Bean, who are due to speak this week. The UK currency may extend its decline against the majority of the major currencies and Euro and Dollar buyers would be well placed to work stop orders in the market to protect against a sustained and aggressive downward move.

EUR/USD

The Dollar bounced back from a near 14-month low against the Euro last week, amid speculation that the U.S job market will be slow to recover and China will end fiscal and monetary stimulus, reducing investors appetite for riskier positions. The U.S currency strengthened 0.2% to $1.4989 against the Euro in New York, after breaking through the $1.50 barrier on Wednesday.

The Dollar weakened beyond $1.50 for the first time since August 2008, amid signs that the economic recovery encouraged investors to sell the Dollar in favour of higher-yielding assets. The U.S currency may remain under pressure in the near term, as the Federal Reserve trails other central banks in raising borrowing costs.

According to a gauge of technical analysis, the Euro may strengthen towards $1.5283 against the Dollar over the coming weeks, after briefly surpassing the pivotal $1.50 level. Howard Friend, chief market strategist at MIG Investments, said yesterday that “bulls retain overall control. The key technical factor remains the completed double-bottom base pattern with the $1.4719 December breakpoint.”

The Euro has strengthened 15% against the Dollar over the past six months and the ECB President Jean-Claude Trichet said on Monday that “excessive volatility” in currencies is “bad for economic development”. Risk appetite was also generally weaker in early European trading, which helped underpin the Dollar to some extent.

Yuji Saito, head of the foreign exchange group in Tokyo at Societe Generale SA, said that “European officials are expressing worry that the Euro’s appreciation is making things difficult for their economy. This is causing the Euro to undergo a downward correction.” The Euro was trading at $1.4939 in London, marginally down from the previous trading day. The single currency may extend its decline, as officials become increasingly concerned with the strength of the Euro and the impact on exports.

In terms of economic data, the focus in the U.S this week will undoubtedly fall on Wednesday’s GDP figur
es for the third quarter. The report is expected to show a return to growth for the first time since June 2008, as consensus forecasts show a 3.3% rise in output. In the Euro-zone, the focus will be on the EC Sentiment index for September, which are expected to continue their upward trend.

Data Released 26th October

U.K 00.01 Hometrack House Prices (October)

GER 07:00 Gfk Consumer Confidence (November)

written by Adam Solomon