Market News

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

GBPEUR/GBPUSD

The Pound rallied strongly against all of the 16 most actively traded currencies yesterday, rising towards the strongest level in five months versus the Euro. Bank of England policy maker Andrew Sentance gave an indication that the central bank may have to raise interest rates to keep a lid on inflation.

The UK currency also made gains versus the Dollar, rising towards the resistance level at $1.6240, while sterling also recorded widespread gains against the higher-yielding currencies, including the Australian Dollar. Sentance said that the central bank cannot “rely on goods deflation” to help keep prices stable as the Pound depreciates.

A report from the Office of National Statistics earlier in the week showed that Consumer prices rose 2.9% from a year earlier, 1 percentage point more than in November.This is the first time since May that inflation has exceeded the Central Bank’s 2% target, and many economists are speculating that it may accelerate further in January.

While officials will argue that the inflation rate will probably drop again later this year, the data puts pressure on the BoE to consider a tightening bias, as the economy recovers from the recession and braces for an election in June. Policy makers will release new forecasts in February on inflation but are expected to announce a drop below 2% and the rate won’t return to target until 2012.

The weakness in sterling may also have attributed to inflationary pressures, as the Pound dropped by about a quarter in the past two years against a trade-weighted basket of currencies, raising the cost of imports for UK manufacturers.The Bank of England are due to decide whether to expand its £200 billion quantitative easing policy to buy government and corporate bonds with newly created money in February.

Paul Robson, a senior foreign exchange strategist at Royal Bank of Scotland Plc, said that “Sentance’s comments may well point to the changing discussion at the Bank of England. The bias is for sterling to drift higher against the Euro.” The Pound rose 0.5% against the Euro yesterday, after slipping the previous session following reports that the UK economy only just escaped recession in the fourth quarter.

Robson also conceded that “Andrew Sentance is in the hawkish camp of the Monetary Policy Committee. It would be much more important if it was someone in the middle like Kate Barker making these comments.” Barker said just last month that the recovery may stall later this year, while Mervyn King believes that the pick up in inflation won’t last.

Coupled with the fact that the UK economy stumbled back to growth in the final quarter of 2009, it is not beyond the realm of possibility that the Bank of England will extend the quantitative easing policy in February and hold off raising interest rates. The renewed optimism surrounding Sterling may not continue, should policy makers be divided on the best course of action for monetary policy.

UK stocks dropped for the fifth time in six days yesterday, amid speculation that Europe, China and the U.S will step up plans to unwind fiscal stimulus measures. Stocks have been an asset bubble for investors over the past year but an end to quantitative easing may have a distinctly negative impact on global stocks.

The FTSE 100 Index fell a further 0.6% yesterday and has fallen 3.1% this year, as the U.S government called for limits on risk taking by banks, and China moved to restrict lending and cool economic growth. The Pound gained against the Australian and New Zealand Dollar yesterday, as risk appetite subsided and traders returned to the relative security of safe haven assets like the Yen and Dollar.

EUR/USD

The Euro plunged to a near six week low versus the Dollar yesterday, as concerns over Greece escalated, after the European Commission said that the nation hasn’t done enough to contain its deficit. The U.S currency came under pressure against the Japanese Yen before the FOMC rate announcement last night, where policy makers were expected to hold interest rates for an extended period.

As expected, the Fed lest interest rates on hold at range between zero and 0.25% but adopted a slightly more optimistic tone towards the economy. The Fed also maintained the commitment to maintaining low interest rates for an extended period, while there was a promise to gradually remove quantitative easing measures.

A government report showed that U.S new home sales unexpectedly dropped in December, signaling that the extension of a government tax credit has yet to rekindle demand. Purchases slumped 7.6% to an annual pace of 342,000, the fewest amount since March. U.S stocks slumped after the report, as the S&P; 500 Index decreased 0.3% in New York.

European Central Bank member Axel Weber said that the bank may take further steps in the first half of this year to withdraw liquidity from the banking sector, as the economy gathers momentum. Weber said in an interview at the World Economic Forum in Davos that “as the economy improves, we’ll take some of the exceptional measures back.”

AUD, NZD

The Australian and New Zealand Dollars fell again against the Pound and the U.S Dollar yesterday, as a plunge in Greece’s public finances discouraged investors’ appetite for higher-yielding assets. The Aussie fell on concern that Greece won’t be able to contain the largest budget deficit in the European Union, a day after it priced €8 billion of bonds.

The New Zealand was close to its lowest in more than a month against the so-called safe haven currencies, before the central bank meeting last night. The reserve bank said that it will keep interest rates at a record low until the middle of this year because inflation is likely to remain within its target range until at least 2012.

Richard Franulovich, a senior currency strategist at Westpac Banking Corp, said yesterday that “the Aussie and Kiwi tend to be more dependent on confidence in global growth. Renewed worries about Greece and Portugal created a sour mood for the markets.” Australian consumer prices rose more than forecast in the latest inflation data, but the Aussie Dollar failed to make gains, despite speculation that the central bank will raise interest rates next week.

Data Released 28th January

EU 10:00 EC Business Climate (January)

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

U.S 13:30 Durable Goods Orders (December)

U.S 13:30 Initial Jobless Claims (w/e 23rd January)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound declined against the 16 most actively traded currencies yesterday, falling over 1% versus the Euro, after a report from the Office of National Statistics showed that the UK economy returned to growth by less than economist forecasts. Gross domestic product rose just 0.1% in the fourth quarter, as service industries and manufacturing expanded just enough to pull the economy out of the longest recession on record.

The UK currency also slumped 0.5% against the U.S Dollar, as the data disappointed investors who had anticipated a 0.4% increase, while the lowest prediction was for a result of 0.2%. Bank of England policy makers will look at the data as they assess the strength of the economic recovery and decide next week whether to exit quantitative easing and withdraw emergency stimulus measures.

The weakness of the pickup in GDP has led to speculation that policy makers won’t raise interest rates any time soon and may even implement further bond purchasing to cement the recovery. The recession, which lasted for six consecutive quarters, has reduced GDP by 6%, as the economy shrank 4.8% in 2009, the biggest annual drop since records began in 1949.

Simon Hayes, chief UK economist at Barclays Capital, said “it’s clearly disappointing. The recovery is going to be uneven. I think the Bank of England will halt quantitative easing in February, but if we don’t see sustained growth it’s likely we may see them extend it in the middle of the year.”

Investors already anticipate that policy makers will exit ultra loose policy measures in February but it seems that economists are sceptical over the strength of the revival and believe that the Central Bank may need to return to quantitative easing at some stage over the coming year. The Prime Minister Gordon Brown said that he is confident the UK is emerging from the recession, but conceded that the recovery “remains fragile.”

The political sparring between Brown and the opposition leader David Cameron has continued this week, with both battling whether to convince voters that they are best placed to rein in the widening budget deficit. Alistair Darling said this week that policy makers need to adopt a cautious approach and that it would be “absolutely mad” to withdraw stimulus measures now.

In the unlikely event that the Bank of England extends the bond purchasing program beyond the current £200 billion, the Pound would come under significant selling pressure. Services, which make up roughly 76% of gross domestic product, expanded just 0.1%, while construction output remain unchanged from the previous month, emphasising the fragile nature of the recovery.

The data was the first for the fourth quarter from the Group of Seven nations and means that Britain is the last of the major economies to exit the recession. The Pound has declined on speculation that the recovery isn’t particularly strong and Euro and Dollar buyers may wish to take advantage of the current rate, or at the very least consider the benefits of a stop order before a sustained decline.

Hans-Guenter Redeker, head of foreign exchange strategy at BNP Paribas SA, said that “growth is slow and inflation is rising, and weakness of the exchange rate has to happen. We are massively bearish on the Pound.” The report yesterday was released just as the Bank of England completed on the existing asset purchase program, before policy makers decide whether to extend it at the bank’s next meeting on February 4th.

Steve Barrow, head of Group of 10 currency strategy at Standard Bank, said that investors should sell the Pound against the Dollar, betting that it will fall to as low as $1.5870. “The trade should be exited if the Pound strengthens to $1.6480.” UK stocks swung between gains and losses yesterday, as a report in the U.S showed that confidence rose to the highest level since September 2008.

EUR/USD

The U.S Dollar and the Japanese Yen made gains against the majority of the 16 most actively traded currencies yesterday, amid speculation that China will take further steps to cool its economy. The Euro fell 0.7% versus the Dollar, as the ECB executive board member Juergen Stark expressed concern that widening deficits among EU member states will undermine investor sentiment.

Reports in Germany showed that German business confidence rose by more than initial estimates to an 18-month high in January, as the global economic recovery boosted exports. The Ifo sentiment index increased to a reading of 95.8, from 94.6 in December, as the German economy continues to recover from the worst recession since the Second World War.

U.S consumer confidence rose in January to the highest level since September 2008, as the labour market continued to improve and consumers became more upbeat about the prospects of the economy. U.S stocks reversed earlier declines after the report, as the Standard & Poor’s 500 Index rose 0.1% in New York.

A form of technical analysis known as the Fibonacci sequence of numbers suggests that the Euro may slump to a seven month low of $1.38 against the U.S Dollar, following a move below the support level at $1.4118. The Euro traded around $1.4150 against the Dollar yesterday, having dropped to a low of $1.4029 on January 21st, the lowest level since July. The target of $1.38 represents a 50% retracement of the Euro’s rally from the March low.

AUD, NZD

The Australian and New Zealand Dollars both fell to their lowest levels in almost three weeks yesterday, as suggestions that China will take further steps to rein in the economy reduced the demand for higher-yielding assets. Risk sentiment is still a prominent force in the market and the Aussie weakened as traders returned to relative security of safe haven assets.

The Kiwi slumped against all of its major counterparts, as we build up to the New Zealand interest rate announcement tomorrow evening. Policy makers may choose to raise interest rates again this month, while the Aussie Dollar fell to a low of $1.8131 versus the Pound, after declining 0.9% against the U.S Dollar.

Data Released 27th January

U.K 09:30 CBI Distributive Trades Survey (January)

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

U.S 19:15 FOMC Rate Announcement

NZ 20:00 RBNZ Rate Announcement

GBPEUR/GBPUSD

The Pound declined against the 16 most actively traded currencies this morning, falling over 1% versus the Euro, after a report from the Office of National Statistics showed that the UK economy returned to growth by less than economists forecasts. Gross domestic product rose just 0.1% in the fourth quarter, as service industries and manufacturing expanded enough to pull the economy out of the longest recession on record.

The UK currency also slumped 0.5% against the U.S Dollar, as the data disappointed investors who had anticipated a 0.4% increase, while the lowest prediction was for a result of 0.2%. Bank of England policy makers will look at the data as they assess the strength of the economic recovery and decide next week whether to exit quantitative easing and withdraw emergency stimulus measures.

The weakness of the pickup in GDP has led to speculation that policy makers won’t raise interest rates any time soon and may even implement further bond purchasing to cement the recovery. The recession, which lasted for six consecutive quarters, has reduced GDP by 6%, as the economy shrank 4.8% in 2009, the biggest annual drop since records began in 1949.

The data was the first for the fourth quarter from the Group of Seven nation and means that Britain is the last of the major economies to exit the recession. The Pound has declined on speculation that the recovery isn’t particularly strong and Euro and Dollar buyers may wish to take advantage of the current rate or at the very least consider the benefits of a stop order before a sustained decline.

written by Adam Solomon