Market News

GBPEUR/GBPUSD

Following on from last week, the Pound rallied against the U.S Dollar on Wednesday, climbing by the most in more than a week, after a report from the Office of National Statistics showed that UK gross domestic product contracted by less than previous estimates in the third quarter. GDP fell 0.3% from the previous three months, compared with a prior measurement of 0.4%, as slumps in manufacturing and services eased.

The government is fighting the worst unemployment rate in 14-years and the resilience in consumer spending is unlikely to last, which could severely undermine the economic recovery. The Bank of England have maintained UK interest rates at the lowest level on record and expanded the quantitative easing program on three occasions since March.

The governor of the Central Bank Mervyn King made a statement to the Treasury Select Committee yesterday and reiterated that a weak Pound is helping towards sustaining the economic revival. King also maintained that additional stimulus measures have ensured Britain’s escape from the recession but the recovery isn’t “particularly strong.”

Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc, said that “sentiment toward the Pound is pretty poor and I expect it to weaken further. It looks as if we have the possibility of further quantitative easing from the Bank of England whereas all the sounds coming out of the European Central Bank are about whether they need to tighten.

The Pound declined to the lowest level in a month against the Euro on Thursday, while the UK currency also lost 1.2% in value versus the U.S Dollar, after UK stocks declined and encouraged investors to seek the security of safe haven assets. The FTSE 100 index plunged 2.7% in London and headed for its steepest drop since May 21st.

The London Stock Exchange Group Plc, whose largest shareholder is Borse Dubai Ltd dropped by the most in eight months, after a proposal by Dubai to delay debt payments triggered the biggest sovereign defult since 2001. HSBC Holdings Plc, a lender to Dubai World, led a retreat among banking shares, while technical problems halted trading in London for more than three hours yesterday.

David Buik, a markets analyst at BGC Partners, said “certainly the Dubai debacle and the uncertainty that is has created has had a severe knock-on effect on European equity markets. This is not the end of the world for Dubai but it is a hammer blow.” The cost of protecting government notes from Qatar and Saudi Arabia rose by the most since June, as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.

Dubai borrowed $80 billion in a four year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub. HSBC Holdings Plc declined 5.3% yesterday, while the FTSE 350 Banks Index plummeted 5.8% to record the steepest decline since May. Dubai’s world lenders include Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc.

The aggressive swings in risk sentiment continue to be the driving force in financial markets and the Pound is under pressure as equities slide. The UK currency may continue to decline against risk sensitive currencies like the Dollar and the Japanese Yen. The Pound also came under pressure yesterday, after Bank of England policy maker Andrew Sentence said that it’s “premature at the moment” to discuss raising interest rates.

Ian Stannard, a senior currency strategist at BNP Paribas SA, said “there are concerns with regard the extent of the UK banking sector exposure in Dubai so that is weighing on Sterling. The underlying picture for Sterling was already fundamentally weak and this news adds to the negative picture.”

Stannard also added that the Pound could fall to $1.57 over the coming weeks and Dollar buyers would be well placed to take advantage of the current rate, after 1% drop in the UK currency yesterday. The UK currency declined 0.6% against the Euro and broke through support at 1.10, despite reports from
the Confederation of British Industry, showing that an index of retail sales rose to the highest level in two years.

The Pound declined to the lowest level since November 3rd against the Dollar on Friday, as the FTSE 100 Index recorded its second week of losses. Goldman Sachs Group Inc downgraded retailers and Dubai’s attempts to reschedule its debt continued to scare investors. The Pound plunged to a low of $1.6287 against the Dollar and may continue to slide over the coming weeks.

Paul Robinosn, a currency strategist at Barclays, said that “at the moment the Pound is being driven by global attitudes to risk. It’s obvious that the economy has shrunk more than government forecasts suggested.” Barclays remain “relatively optimistic” about the outlook for the Pound and still forecast that the UK currency will hit $1.64 against the Dollar and 1.1365 versus the Euro by March.

The Pound may remain on the back foot this week, ahead of the Bank of England interest rate announcement on Thursday. Investors will be looking to the UK’s November manufacturing and services PMIs for direction, but the UK currency remains vulnerable to speculation surrounding additional quantitative easing and the spike in risk aversion.

EUR/USD

The Dollar rallied against 14 out of the 16 most actively traded currencies last week, after Dubai’s attempt to reschedule its debt encouraged investors to seek the security of so-called safe haven assets. The U.S currency remained largely unchanged against the Euro, gaining towards $1.4950 in New York, from a low of $1.5144 on Wednesday, the weakest level since August 2008.

Geoffrey Yu, a currency strategist at UBS AG, said yesterday that “markets took it as the Fed gave a green light to sell the Dollar. At the same time, it seems that all central banks are sounding a bit more positive.” The Euro retreated from a 15-month high amid speculation that the single currency has risen too quickly and traders adjudged the move as overdone.

Following last week’s increase in risk aversion, investor’s appetite could be the key feature this week, with the Dollar and the Japanese Yen the biggest gainers. Mounting concerns over Dubai’s debt position will be the driving force in financial markets this week, preventing the Euro from mounting a further challenge above the $1.50 level.

Data Released 30th November

U.K 00:01 Gfk Consumer Confidence (November)

U.K 00:01 Hometrack House Prices (November)

U.K 09:30 Consumer Credit (October)

U.K 09:30 Mortgage Applications (October)

EU 10:00 Flash HICP (November)

U.S 14:45 Chicago PMI (November)

GBPEUR/GBPUSD

The Pound declined to the lowest level in a month against the Euro yesterday, while the UK currency also lost 1.2% in value versus the U.S Dollar, after UK stocks declined and encouraged investors to seek the security of safe haven assets. The FTSE 100 index plunged 2.7% in London and headed for its steepest drop since May 21st.

The London Stock Exchange Group Plc, whose largest shareholder is Borse Dubai Ltd dropped by the most in eight months, after a proposal by Dubai to delay debt payments triggered the biggest sovereign default since 2001. HSBC Holdings Plc, a lender to Dubai World, led a retreat among banking shares, while technical problems halted trading in London for more than three hours yesterday.

David Buik, a markets analyst at BGC Partners, said “certainly the Dubai debacle and the uncertainty that is has created has had a severe knock-on effect on European equity markets. This is not the end of the world for Dubai but it is a hammer blow.” The cost of protecting government notes from Qatar and Saudi Arabia rose by the most since June, as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.

Dubai borrowed $80 billion in a four year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub. HSBC Holdings Plc declined 5.3% yesterday, while the FTSE 350 Banks Index plummeted 5.8% to record the steepest decline since May. Dubai’s world lenders include Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc.

The aggressive swings in risk sentiment continue to be the driving force in financial markets and the Pound is under pressure as equities slide. The UK currency may continue to decline against risk sensitive currencies like the Dollar and the Japanese Yen. The Pound also came under pressure yesterday, after Bank of England policy maker Andrew Sentence said that it’s “premature at the moment” to discuss raising interest rates.

Sean Maloney, a fixed-income strategist at Nomura International Plc, said “there has been a bit of de-risking. The Dubai story has also weighed on the mindset of investors.” Elsewhere, Ian Stannard, a senior currency strategist at BNP Paribas SA, said “there are concerns with regard the extent of the UK banking sector exposure in Dubai so that is weighing on Sterling. The underlying picture for Sterling was already fundamentally weak and this news adds to the negative picture.”

Stannard also added that the Pound could fall to $1.57 over the coming weeks and Dollar buyers would be well placed to take advantage of the current rate, after 1% drop in the UK currency yesterday. The UK currency declined 0.6% against the Euro and broke through support at 1.10, despite reports from
the Confederation of British Industry, showing that an index of retail sales rose to the highest level in two years.

Retailers saying that sales rose from a year earlier significantly outnumbered those reporting declines by 13 percentage points, the highest margin since November 2007. The report from the CBI is just the latest indication that the UK economy has returned to growth in the fourth quarter, after the longest recession on record.

EUR/USD

The Dollar rallied against 14 out of the 16 most actively traded currencies yesterday, after Dubai’s attempt to reschedule its debt encouraged investors to seek the security of so-called safe haven assets. The U.S currency remained largely unchanged against the Euro, gaining towards $1.5020 in New York, from a low of $1.5144 on Wednesday, the weakest level since August 2008.

The FOMC minutes from the November meeting were released on Wednesday evening and showed that Fed officials believe that the Dollar’s decline has been “orderly” and they would watch for any signs that the depreciation in the U.S currency is pushing up inflation expectations. Geoffrey Yu, a currency strategist at UBS AG, said yesterday that “markets took it as the Fed gave a green light to sell the Dollar. At the same time, it seems that all central banks are sounding a bit more positive.”

The Dollar declined heavily against the Euro and other higher-yielding assets, including the Australian Dollar, but the U.S currency stemmed the losses yesterday, as risk aversion crept back into the market. The Euro retreated from a 15-month high amid speculation that the single currency has risen too quickly and traders adjudged the move as overdone.

Data Released 27th November

EU 10:00 – Business Climate (November)

EU 10:00 – Economic Sentiment (November) – Industrial / Services / Consumer

written by Adam Solomon

GBPEUR/GBPUSD

The Pound rallied against the U.S Dollar yesterday, climbing by the most in more than a week, after a report from the Office of National Statistics showed that UK gross domestic product contracted by less than previous estimates in the third quarter. GDP fell 0.3% from the previous three months, compared with a prior measurement of 0.4%, as slumps in manufacturing and services eased.

The modest upward revision in UK economic growth provides some optimism that the longest recession on record is coming to an end. The Prime Minister Gordon Brown has reiterated his desire to keep emergency stimulus measures in place to avoid “chocking the recovery”, as the general elections looms largely on the horizon.

The government is fighting the worst unemployment rate in 14-years and the resilience in consumer spending is unlikely to last, which could severely undermine the economic recovery. The Bank of England have maintained UK interest rates at the lowest level on record and expanded the quantitative easing program on three occasions since March.

The governor of the Central Bank Mervyn King made a statement to the Treasury Select Committee yesterday and reiterated that a weak Pound is helping towards sustaining the economic revival. King also maintained that additional stimulus measures have ensured Britain’s escape from the recession but the recovery isn’t “particularly strong.”

Nick Kounis, chief economist at Frotis Bank Nederland NV, said that “over the coming quarters the economy will accelerate pretty sharply. In the third quarter the UK was one of the sick men of Europe but it’s going to step up a few gears and will be one of the stronger performers in Europe next year.”

Kounis makes an interesting point that the Pound and the UK economy in general will overtake the rest of Europe in 2010. However, the UK’s recovery is likely to lag behind the rest of Europe and the U.S, which have both returned to growth, because speculation persists that the BoE’s quantitative easing policy may be extended beyond £200 billion.

Geoffrey Yu, a currency strategist at UBS AG, said “as we didn’t get a downside surprise the fourth quarter number will probably be strong. This removes the clouds of uncertainty over Sterling. I’m not saying we should pile in but the outlook is certainly brightening.” The Pound dropped back towards Tuesday’s low at 1.1050 against the Euro yesterday and the UK currency is establishing a trading range between 1.10 and 1.1270.

In stark contrast to Yu’s comments, Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc, said that “sentiment toward the Pound is pretty poor and I expect it to weaken further. It looks as if we have the possibility of further quantitative easing from the Bank of England whereas all the sounds coming out of the European Central Bank are about whether they need to tighten.”

Data released in Germany yesterday showed that economic growth accelerated in the third quarter, while the U.S economy expanded at a 2.8% annual rate. The Pound rose 0.9% against the Dollar yesterday, hitting a high of $1.6740 in London, after the upward revision in UK GDP sent the FTSE 100 Index 0.8% higher.

The increase in risk appetite wiped out yesterday’s losses and the FTSE 100 has climbed 53% since the March 3rd low, as governments worldwide embarked on spending programs and cut borrowing costs to revive the world economy. Stocks also extended gains yesterday, after U.S initial jobless claims fell more than expected to the lowest level since September 2008.

EUR/USD

The Dollar declined towards the lowest level in 14-months versus the Dollar yesterday, as the Federal Reserve gave an indication that it will tolerate a weaker currency and encouraged investors to buy higher-yielding assets. Fed officials said on November 4th that interest rates will remain close to zero for an “extended period.”

In terms of economic data, a regional survey on U.S consumer confidence showed that sentiment remained fragile in November for a second straight month. A weak labour market threatens to weigh on spending going into the festive period, while a separate report on U.S new home sales showed that purchases rebounded more than anticipated in November.

Consumer spending accounts for roughly 70% of the U.S economy and may be unpredictable through the first quarter of 2010 with a jobless rate that is expected to remain above 10% through to the middle of next year. The Dollar may continue to weaken against the Euro in the short-term and a break towards $1.5250 may signal a sustained upward move.

Data Released 26th November

U.K 11:00 CBI Distributive Trades Survey (November)

EU 09:00 M3 / 3 Mth Moving Average (October)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound continued to decline against the Euro yesterday, while the UK currency also traded lower versus the U.S Dollar, after the Bank of England governor Mervyn King delivered his statement to the UK Treasury Select Committee. In a written report, King told lawmakers that the Pound’s depreciation is helping boost economic demand, alongside other factors such as additional stimulus measures.

The UK currency is poised to record its longest run of losses in more than two months against the Euro, as King regurgitated the same pessimistic outlook on the UK economy that he and his colleagues have been spouting for some time. He said that the economy faces “profound challenges”, fueling speculation that the bank may extend quantitative easing beyond the current level.

King also said that the Bank of England would take at least two years to raise interest rates and sell bonds bought in emergency aid for the economy. He told Parliament’s Treasury Committee that “we would, over a period of two to three years, engage in both kinds of actions. The difficult judgment, which is the overriding problem, is to know by how much and when to do it.”

The minutes from the Central Bank’s last policy meeting showed that the nine-member monetary policy committee was split three ways in the decision to extend bond purchases to £200 billion. King reiterated that he has an “open mind” after further quantitative easing, after the preliminary GDP report showed an unexpected contraction in the third quarter.

The UK economy contracted 0.4% in the three months through September, putting the UK behind the U.S, Japan and Germany in exiting the deepest recession since the Second World War. King said yesterday that “you should expect pretty buoyant growth rates in the short run because the slump has been so deep. It’s actually not a particularly strong recovery.”

The latest quarterly projections from the Bank of England suggests that the UK will exit the recession in the fourth quarter and expand 2.2% in 2010. That compares favourably with estimates of 1.9% three months ago and the projections are based from the modal path for GDP, based on the bank maintaining £200 billion of asset purchases.

The Pound declined 0.6% against the Dollar yesterday to a low of $1.6499 in London, as UK stocks dropped, having gained the most in over a month on Monday. The benchmark FTSE 100 Index lost 0.4%, as a retreat in metal prices weighed heavily on raw-material producers. However, losses were limited after Lloyds Banking Group Plc said that it plans to raise £13.5 billion in the country’s biggest rights offering.

The Pound also fell against the Dollar after the Commerce Department confirmed that the U.S economy expanded at a rate 2.8% in the third quarter, less than the government had reported in October. Ian Stannard, a senior currency strategist at BNP Paribas SA, said that “sterling is going to be extremely vulnerable in this environment of risk appetite being challenged.”

EUR/USD

The Euro declined against the U.S Dollar yesterday, as the single currency failed to break through the resistance at $1.50, after U.S consumer confidence showed an unexpected increase in November. The index, which focuses on labour market and purchase plans, advanced beyond economists’ predictions. Mounting concerns over the labour market may limit spending in the coming months, as unemployment rises to the highest level in 26-years.

Elsewhere, U.S house prices fell 3.8% in the third quarter, representing the smallest decline since the first quarter of 2008, as a tax credit for first time buyers increased demand. The report illustrates the rising sense of optimism in the U.S housing sector, as the government implements a number of schemes aimed at improving lending and slowing foreclosure driven price drops.

The Euro made initial gains against the majors, amid reports in Germany that business confidence increased by more than expected to the highest level in 15-months. The Ifo index showed that the economic recovery may be gathering momentum, as companies replenish inventories and rising export orders encourage companies to step up production.

Data Released 25th November

U.K 09:30 Gross Domestic Product (Revised Q3)

U.S 13:30 Personal Income / Expenditure (October) – Core PCE

U.S 13:30 Durable Goods (October)

U.S 13:30 Initial Jobless Claims (w/e 21st November)

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

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

U.S 19:00 FOMC Publishes Minutes of 3rd/4th November Meeting

written by Adam Solomon