The Pound rallied strongly against the U.S Dollar for the first time in three days and the UK currency also recovered earlier losses versus the Euro, as investors speculated that Britain will be able to rein in its budget deficit even if voters fail to elect a government with a majority in parliament. Sterling also gained the most against the Japanese Yen, ahead of the final live televised debate last night.
An opinion poll in the Sun newspaper the Conservatives had 34% of support, the Liberal Democrats on 31% and the ruling Labour Party with just 27%, indicating that a smaller Lib Dems might hold the balance of power after the May 6th vote.
Ian Spreadbury, manager of Fidelity International’s Strategic Bond Fund, said “in the event of a hung parliament, which is now looking quite likely, we would have some form of power sharing involving the Liberal Democrats. Their attitude to tackling the deficit is quite robust and so I don’t think it would be a disaster for the markets.”
The Pound rose 0.6% to $1.5301, after falling to the lowest level since April 8th and a break above $1.5350 would indicate that further gains are likely. The UK currency also advanced 0.4% versus the Euro, recovering back above 1.15 before the close of trading last night.
The instant reaction opinion polls showed that the Conservative leader David Cameron won the final debate of the UK election campaign, gaining momentum in his bid to oust Gordon Brown. Cameron’s central message in the 90-minute debate in Birmingham was that 13-years of Labour rule had left Britain with the highest unemployment rate in 16-years and an economy struggling to recover from the worst recession on record.
The Pound rose 0.4% against the Dollar in the minutes that followed the debate, amid renewed optimism that Cameron’s performance increased the slim prospect of a majority win next week. Concern that Britain will struggle to narrow the budget deficit, amid a period of very aneamic growth has contributed to the Pound’s 5.5% decline against the Dollar this year.
The ratings agency Standard & Poor’s has reduced its ratings on Greece, Portugal and Spain this week, increasing the debate among UK politicians on how to cut spending. David Cameron said in the build-up to last night’s debate that “Greece stands as a warning” to indebted countries.
Paul robson, a senior foreign exchange strategist at Royal Bank of Scotland Group Plc, said that “investors are reassessing sterling’s recent weakness. The fact that Greece is getting into more problems is a greater reason to believe that the UK will do the right thing on the budget deficit.”
Investors believe that a Conservative majority would be preferable for the bond market because they have a more aggressive plan for cutting the deficit. The Prime Minister Gordon Brown argues that reducing government spending too quickly would harm the economic recovery and prompt a “double-dip recession.”
The Pound also gained support yesterday, after the Nationwide Building Society said that UK house prices rose by twice as much as initial forecasts in April, as the property shortage continued. The average cost of a home rose 1% from March to £167,802 and prices are up 10.5% from a year earlier.
EUR/USD
The Euro rose for a near one-year low against the U.S Dollar yesterday, as Greece’s Prime Minister George Papandreou tried to persuade labour unions to accept austerity measures, while German unemployment fell. Joe Manimbo, a market analyst at Travelex Global Business Payments, said that “the euro is stronger on hopes that officials in Europe will offer Greece financial support.”
Despite concern surrounding the debt levels in some peripheral member nations, European confidence in the economic outlook improved to the highest level in more than two years. An index of executive and consumer sentiment rose to a reading of 100.6 in April, from a revised 97.9 in March, exceeding initial forecasts.
Accelerating global economic growth is bolstering confidence and boosting sales at European companies. However, Greece’s budget crisis is already threatening to curtail momentum in the recovery and the Euro’s tentitative gain against the Dollar yesterday may not last, even as global sentiment improves.
The Pound declined 0.6% against the Dollar yesterday to $1.5168, while the UK currency dipped to lows around 1.1450 versus the Euro, after former Bank of England policy maker Timothy Besley said that the UK economy remained in a “fragile state” and inflation is likely to stay under control through the remainder of the year.
Besley said that “until we’ve seen a run of data that support the idea that we’re on a road to recovery, we have to still mark down the economy as in somewhat a fragile state.” Britain’s three main political parties have committed to cutting the fiscal debt levels in the UK without outlining exactly how they plan to rein in the budget deficit.
The gap, which at more than 11% of gross domestic product is the largest in the Group of Seven nations, has dominated the election campaign and will be the primary topic of discussion in the final live televised debate this evening. The deficit has jumped 76% in the year through March to £152.8 billion, the most since the Second World War. It was £23.5 billion in March, the biggest for any month since records began in 1993.
Ian Stannard, a foreign exchange strategist at BNP Paribas SA, said “sterling will probably remain under pressure and weaken further against the Dollar. We have to be prepared for sterling heading back down to the March lows around the $1.4785 area over the coming week.”
Sterling weakened against 14 out of the 16 most actively traded currencies, after Besley said that further evidence is needed to show that the recovery is taking hold. His comments may indicate that the Central Bank’s monetary policy committee have no intention of raising UK interest rates from a record low of 0.5%, despite rising inflationary pressures becoming entrenched in the broader economy.
The anemic pace of economic growth means that price pressure within the economy will probably subside in the second half of the year. The preliminary first quarter growth figures showed that the economy expanded just 0.2% in the first three months of the year, half the pace of the recovery in the fourth quarter of 2009.
The political uncertainty and concern over a “double-dip recession” has seen the Pound decline 5.8% versus the Dollar in the past three months and the UK currency is the only currency to depreciate against the Euro in that period, amid intense speculation that the May 6th general election will produce a government too weak to tackle the ever-widening budget deficit.
Stuart Bennett, a senior foreign exchange strategist at Credit Agricole Corporate and Investment Bank, said that “we’re in an ongoing period of sterling negativity. This is linked to last week’s GDP numbers and lingering political uncertainty.” The Pound has fallen to the lowest level since April 8th against the Dollar this week and further losses are likely, after the UK currency plunged below the pivotal support at 1.5350.
The UK sovereign credit rating will be an important market focus in the short-term and there will certainly be further speculation that the AAA rating will be lost over the coming months. The ratings agencies, however, are likely to wait for early developments in the next parliament and will also be very reluctant to make any change during an election campaign.
To that end, the rating should be secure for the time being, but any move to downgrade would have a substantial negative impact on the Pound and confidence is liable to be fragile, especially after the Spanish downgrade yesterday. Despite a relatively positive Nationwide house price survey, the Pound has retreated back to lows around $1.5150 against the Dollar this morning.
EUR/USD
The Euro plummeted to the lowest level in a year against the Dollar yesterday, after the rating agency Standard & Poor’s cut the debt rating of Spain in a sign that Europe’s deficit crisis is spreading to other member nations. The single currency fluctuated as Germany’s Chancellor Angela Merkel pledged in Berlin to step up efforts to overcome the Greece fiscal crisis.
Boris Schlossberg, director of currency research at online currency trader GFT Forex in New York, said that “the European fiscal authorities have let the situation get out of hand, and there’s a wholesale loss of confidence by investors. The dominoes are falling one by one.” There was even concern last night over the long-term existence of the Euro, as investors assessed the problems in a number of peripheral member nations.
The U.S Federal Reserve held interest rates unchanged between a range of zero to 0.25% and policy makers maintained the same tone and language in the accompanying statement. The Fed said that interest rates will remain at exceptionally low levels for an extended period. A withdrawal of that statement would indicate that policy makers are willing to raise interest rates.
The Pound weakened against 15 out of the 16 most actively traded currencies yesterday, amid growing evidence that next week’s general election will produce a government without the parliamentary support needed to tackle the record budget deficit that is the biggest among the Group of Seven nations.
A daily ComRes Ltd opinion poll published on Monday showed that 32% of respondents backed the Conservatives, 31% favoured the Liberal Democrats, while just 28% supported Gordon Brown’s Labour Party. The survey is the latest in a long line of opinion polls to suggest that the May 6th election will produce the first Hung parliament since 1974.
Adam Cole, head of global currency strategy at Royal Bank of Canada, said that the “focus is on the opinion polls. If we continue to see this picture of the Tories leading, Lib Dems second and Labour third in the run-up to the election, that’s a negative backdrop for Sterling.” Due to the fundamental lack of any significant economic data, the Pound has been susceptible to volatility surrounding the latest opinion polls.
The UK currency declined 0.8% to trade under the pivotal resistance level at $1.5350 against the Dollar, while the Pound also traded down towards 1.15 versus the Euro, after rising to the highest level since January. The prospect of a political deadlock following the May 6th election has been the catalyst to a 5.2% decline in the Pound versus the Dollar this year.
The Pound erased an earlier decline against the Euro yesterday, after Standard & Poor’s Ratings Services cut Greece’s and Portugal’s credit ratings, prompting a sell off in bonds from indebted European nations, which sent stocks sharply lower. The UK currency has rallied 2.9% in the past month, as all three main leaders pledged to tackle the budget deficit if elected.
Business Secretary Peter Mandleson yesterday sought to reassure investors that a hung parliament would not lead to instability in the economy. He told reporters, “I think that the markets have pretty much discounted whatever the result. I think that they know that in our political system you will get sensible, stable, grown-up politics.”
Mandleson’s comments contradict George Osborne, the Conservatives’ Treasury spokesman, who yesterday predicted a hung Parliament could lead to a “dip in confidence,” a slump in the Pound and “disastrous” increases in interest rates that would “paralyse” the economy. The Pound also weakened against the Dollar, even after the British Bankers’ Association said yesterday that mortgage approvals rose in March.
Banks granted 34,905 home loans last month, compared with 33,360 in February. Jeremy Stretch, a senior currency strategist at Rabobank International, said that “sterling got close to the top of its range near $1.55 yesterday, and that’s always a propensity for a bit of a correction. Similarly, we got down close to 86 pence against the Euro. In both cases, there was always a bit of a correction risk.”
Due to the distinct lack of UK economic data released this week, the Pound may still be vulnerable should political uncertainty detract from action to bolster the economy and cut the deficit. Mike Turner, head of strategy at Aberdeen Asset Management Plc, said “the fear is you don’t get any clarity, immediately anyway, and it still hits Sterling.”
The budget deficit widened 76% in the year through March to £152.8 billion, the largest since the Second World War. In March, it was £23/5 billion, the most for any month since records began in 1993. On a slightly more positive note, the Confederation of British Industry said yesterday that an index of retail sales stayed positive in April, as expectations of sales rose to a five month high.
EUR/USD
The Euro plunged below $1.32 against the Dollar for the first time since April 2009, after Standard & Poor’s lowered Greece’s debt to “junk” and cut the rating for Portugal. The Dollar and the Japanese Yen rallied versus the majority of the 16 most actively traded currencies, amid concern that European governments are struggling to contain the debt crisis.
The increase in risk aversion diminished traders appetite for the so-called high-yielding currencies, including the South African Rand and Australian Dollar, while the Euro fell by the most against the U.S currency since June 2009.
Richard Franulovich, a senior currency strategist at Westpac Banking Corp, said that “there’s been a pretty catastrophic breakdown in peripheral Europe. It’s just a matter of time before we break $1.30 and go to $1.25.” The Euro slipped 1.6% to $1.3175 at the close of trading last night, ahead of the Federal Reserve interest rate announcement today.
Britain’s economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply, hitting the lowest levels against the Kiwi since April 1st. The New Zealand dollar strengthened further yesterday as investors looked ahead to the prospect of interest rate rises. That theme was buoyed today on news that Fonterra, the world’s largest dairy exporter said its farmer members will receive prices around 7% higher than expected for 2009-2010 production of milk solids. That increase adds around 0.3% to the country’s GDP.
It’s a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed’ have made a habit of stating that rates will remain low for “an extended period”. Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed’s warning to the market that a rate rise is on the way, and would negatively impact the high yielding currencies, which at present are continuing to benefit from investor risk appetite and the lack of yield on the US dollar. Analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009. Interest rates aside, positive US economic data tends to add to the allure of the high yielding currencies. Investors take these US data as a sign of global recovery, and perversely, they sell the US dollar and buy the Australian and New Zealand dollars as appetite for risk increases along with their confidence in the global economic outlook.
The dominant story driving the pound this week is of course, the general election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit. Press comment over the weekend has pointed toward other countries that have run successful coalition governments, in particular Germany, and the current strength of sterling against the euro may support that view.
Australian inflation data on Wednesday is expected to show an annualised inflation rate around 2.8%. On Friday a Reserve bank official said that interest rates are now “close to average”, indicating that the rate tightening cycle may slow. The RBA has raised interest rates several times over the last few months, most recently on April 6th when they raised the benchmark lending rate to 4.25%. The next policy meeting is May 4th, and following Friday’s comments futures markets are now pricing in a 26% chance of another rate hike, down from 40% before the comments were made. If Wednesday’s inflation data is higher than expected, the chances of another rate hike will increase, and that could drive AUD and NZD higher. Conversely, a figure on or below expectations should reinforce the “no change” view.
The technical outlook remains negative for sterling. Demand for the Kiwi remains very strong, and the fundamentals driving that demand are still very much in place. Stock markets are hitting new highs almost every week (stocks are a barometer of investor risk sentiment) and commodities are also rising. The price chart is still showing a down trend, and after a rally in late March the market appears to be turning lower again. Watch out for a return to the recent lows below 2.10. We continue to recommend a cautious approach, hedging at least half of any exposure at current levels.
The Pound rallied against the U.S Dollar for the first time in three days yesterday, the UK currency touched upon the strongest level in two-months versus the Euro, after a report from Hometrack Ltd showed that UK house prices rose in April for the ninth consecutive month. The UK currency advanced against 13 out of 16 most actively traded currencies, as the report added to evidence that the economic recovery is gathering momentum.
The average cost of a home in England and Wales increased 0.2% from March, as prices rose just 1.8% from a year earlier, the slowest pace in three months. The UK property market’s momentum is waning, as more Britons lose their jobs in the aftermath of the worst recession in a generation. Political campaigning before the May 6th election is also undermining confidence, as speculation mounts of the first minority government since 1974.
Richard Donnell, director of research at Hometrack, said in a statement that “rising unemployment, lack of mortgage funding, public spending cuts and the prospect of tax rises post-election, continue to act as a back-drop to a fragile and increasingly polarised housing market.”
Ian Stannard, a foreign exchange strategist at BNP Paribas SA, said that “the Hometrack data was reasonably robust, which works in Sterling’s favour in the current environment. Sterling is getting support from the analysis of the latest opinion polls. The market assumes there is a chance the Conservatives could scrape through.” Therefore, if a poll shows the Conservatives’ lead has waned, the Pound is likely to lose ground from the current levels.
A separate report yesterday from Rightmove Plc showed that some Britons lost confidence in the outlook for the housing market, while half of consumers surveyed this month predicted that prices will be higher in a year’s time, down from 53% in January. George Buckley, chief UK economist at Deutsche Bank AG, said that house prices will fall by as much as 5% during 2011, as interest rates begin rising from the end of the year.
The preliminary first quarter growth figures showed that the UK economy expanded just 0.2% in the first quarter, half the face forecast by economists, pointing to anemic growth and increasing the prospect of a “double-dip recession.” Unemployment has risen to the highest level in 16-years and Britain’s main political parties are in the final two weeks of a campaign centered around plans to tame the public finances.
The Pound also gained ground after a YouGov Plc poll put the Conservative Party in the lead at 34% ahead of the May 6th election. Liberal Democrat leader Nick Clegg said yesterday that it would be “preposterous” for Gordon Brown to remain in power if Labour comes third in the popular vote. The UK currency was up 0.6% to $1.5473 against the Dollar and appreciated 0.9% versus the struggling Euro.
The Pound is also gaining on risk sentiment, as UK stocks rose for a second day, as mining companies climbed with metal prices. The benchmark FTSE 100 Index advanced 0.5%, extending this year’s advance to 6.3%, as the economy emerges tentatively from the recession. David Jones, chief market strategist at IG Index, said “commodity shares are playing their part once again. Looking ahead it is going to be company earnings that drive sentiment.”
The UK currency retreated from highs against the Dollar and the Euro overnight, as the polls still suggest an increasing likelihood of a hung parliament. Analysts at UBS AG said that the Pound may drop more if a single party does clinch a parliamentary majority and cuts the budget deficit too fast. Mansoor Mohi-uddin, chief currency strategist at UBS in Singapore, said “investors should be concerned if any party wins an outright majority and cuts the budget too quickly while the UK economy is fragile.”
EUR/USD
The Euro dropped against all of the 16 most actively traded currencies yesterday, amid concern that the EU aid package for Greece won’t prevent the deficit crisis spreading to other member nations. The single currency fell to its lowest level since January versus the Pound and hit an annual low versus the Dollar, as Germany Chancellor Angela Merkel said that she won’t release funds for Greece until the nation has a “sustainable” plan to cut its deficit.
The Euro pared its loss against the Dollar, as Bundesbank President Axel Weber told CNBC that the Euro doesn’t have a “credibility” issue. However, Yu-Dee Chang, chief executive officer of ACE Investment Strategists LLC, said yesterday that “every time a resolution is announced, Germany comes out and says wait a minute, it’s not a done deal. That adds to uncertainty for the Euro.”
There was a fundamental lack of U.S economic data released during the day but speculation of reduced interest in dollar-funded carry trades provided a degree of support for the U.S currency. Investors will be cautious ahead of Wednesday’s FOMC interest rate announcement. Expectations of a shift in the Fed’s language have consistently disappointed.
Last week the Rand ended a losing streak that saw it decline 4% versus sterling so far this month. It was UK growth figures that put the brakes on the pound’s rally, but the reversal also coincides with key technical resistance at the 11.50 level. That level was an important low back in October, and having broken decisively below it in March the market has been testing it from below over the last two weeks. Commodities also had a good day on Friday, giving the Rand a useful tailwind. Gold and platinum account for 22% of South Africa’s exports. Also helping the currency is a consensus that the reserve bank will refrain from cutting interest rates at the May 13th meeting, electing instead to keep rates steady at 6.5%.
Britain’s economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply from the 11.50 level. Having digested the growth data over the weekend, investors decided that there’s a good chance of it being revised higher for the final reading. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
The Greek debt situation continues to weigh on currency markets. On the one hand investors applauded on Friday when Greece indicated that it would activate the aid package; but the Euro has softened again today as doubt over the when and how of aid delivery begin to fester. The Greek finance minister yesterday promised that the €45bn aid package would be available in time to avoid a debt default. Greece is scheduled to repay €11bn by the end of May.
It’s a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed’ have made a habit of stating that rates will remain low for “an extended period”. Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed’s warning to the market that a rate rise is on the way, and would negatively impact the high yielding currencies, which at present are continuing to benefit from investor risk appetite and the lack of yield on the US dollar. Analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009. Interest rates aside, positive US economic data tends to add to the allure of the high yielding currencies. Investors take good US news as a sign of global recovery, and perversely, they sell the US dollar and buy currencies like the Rand as appetite for risk increases with their confidence in the economic outlook.
The technical outlook is negative for sterling unless we can make a decisive break above the 11.50 resistance. So far the pound has been unable to do this. Buyers of the Rand should take a cautious approach and consider covering their exposure at current levels.
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Britain’s economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply, dropping back below the 1.6675 resistance that we highlighted in recent reports. This morning the pound is ticking higher as investors, having digested the growth data, decided that there’s a good chance of it being revised higher for the final reading. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
It’s a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed’ have made a habit of stating that rates will remain low for “an extended period”. Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed’s warning to the market that a rate rise is on the way, and would negatively impact the high yielding currencies, which at present are continuing to benefit from investor risk appetite and the lack of yield on the US dollar. Analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009. Interest rates aside, positive US economic data tends to add to the allure of the high yielders. Investors take these US data as a sign of global recovery, and perversely, they sell the US dollar and buy the Aussie dollar as appetite for risk increases along with their confidence in the economic outlook.
The dominant story driving the pound this week is of course, the general election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit. Press comment over the weekend has pointed toward other countries that have run successful coalition governments, in particular Germany, and the current strength of sterling against the euro may support that view.
Australian inflation data on Wednesday is expected to show an annualised inflation rate around 2.8%. On Friday a Reserve bank official said that interest rates are now “close to average”, indicating that the rate tightening cycle may slow. The RBA has raised interest rates several times over the last few months, most recently on April 6th when they raised the benchmark lending rate to 4.25%. The next policy meeting is May 4th, and following Friday’s comments futures markets are now pricing in a 26% chance of another rate hike, down from 40% before the comments were made. If Wednesday’s inflation data is higher than expected, the chances of another rate hike will increase, and that could drive AUD higher. Conversely, a figure on or below expectations should reinforce the “no change” view.
The technical outlook remains negative for sterling. Demand for the Aussie dollar remains very strong, and the fundamentals driving that demand are still very much in place. Stock markets are hitting new highs almost every week (stocks are a barometer of investor risk sentiment) and commodities are also rising. The Australian economy is a net exporter of commodities (including gold) and benefits from higher prices. The price chart is still showing a down trend, and we would need to see sterling capture the 1.6675 level to improve the outlook. We continue to recommend a cautious approach, hedging at least half of any exposure at current levels.
Britain’s economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply, but recovered to end the session unchanged. This morning the pound is ticking higher as investors, having digested the growth data, decided that there’s a good chance of it being revised higher for the final reading. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
It’s a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed’ have made a habit of stating that rates will remain low for “an extended period”. Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed’s warning to the market that a rate rise is on the way. Turning to growth, analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009.
Data aside, the underlying story driving the markets is of course, the general election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit. Press comment over the weekend has pointed toward other countries that have run successful coalition governments, in particular Germany, and the current strength of sterling may support that view.
The pound has also benefitted from renewed concerns over the Greek bailout. The Euro has been on the back foot even as Greece’s finance minister promised over the weekend that aid will be delivered in time to stave off a potential default, but markets are unconvinced of exactly how and when funds will materialise. Greece is due to repay €11bn by the end of May in interest and refinancing costs.
Robust US manufacturing and home sales data helped to renew positive sentiment toward the global economic recovery. The US dollar has been in a holding pattern against almost all other major currencies over the last two weeks, balanced by better domestic data (which perversely tends to weaken the dollar as investors move toward higher yielding/riskier assets) and the Greek debt story which is keeping all eyes on the news wires in case the sovereign debt problems spread to countries like Spain and Portugal. Meanwhile, stock markets continue to march ever higher!
The technical outlook remains positive for sterling. We have spent a couple of weeks trading mostly above the March high at 1.5380, and seem to have established a new foothold at 1.5300 on Friday. If we can now progress above 1.5524 (the April high to date) then sterling should continue to do well. The next noteworthy resistance points are 1.5575 and then 1.5821. Clients should still take a cautious approach and consider placing stop orders below 1.5190 (based on the interbank rate). That was last week’s low, and a break below there would do serious damage to the short term up trend that we’ve established over the last few weeks.
Following on from last week, the Pound strengthened significantly against the Dollar and the Euro, as the overall improvement in global risk appetite diminished demand for the U.S currency as a refuge, while a government report showed that the number of Britons claiming jobless benefits declined in March by more than initial estimates.
A wider measure of unemployment climbed to the highest level in 16-years, although the number of people collecting jobless benefits fell 32,900 from February to 1.54 million, well ahead of initial forecasts. The data provides ammunition to both the Prime Minister Gordon Brown and David Cameron in the run-up to the May 6th General Election.
Brown is trying to gain ground in a three-way race for the election by arguing that the economic recovery is too fragile to tackle the record budget deficit. The Labour Party has lost support to Cameron’s Conservatives, who want to cut public spending immediately, and the resurgent Liberal Democrat Party, led by Nick Clegg.
Opinion polls published last week showed Labour slipping into third place, after a surge in support for the Liberal Democrats following Clegg’s performance in the first televised debate on April 15th. The result means Labour could win the most seats in Parliament and remain in power with the support of the Liberal Democrats in what would be the first Hung Parliament since 1974.
The unemployment data will fuel optimism that the Bank of England will have to raise interest rates at a faster pace than previously anticipated, while a report earlier this week showed that consumer prices breached the upper limit of 3% for the second time this year. The minutes from the Central Bank’s last policy meeting, also released on Tuesday, showed that the MPC voted unanimously to hold the bond-purchasing plan at £200 billion in April.
Some policy makers even expressed concern at the prospect of a prolonged bout of faster inflation. The Committee, led by the governor Mervyn King, decided to keep interest rates unchanged at a record low of 0.5%. Officials are trying to balance anemic growth against the threat of accelerating inflation and policy makers have suspended comment on policy prior to the election.
The Pound rose to the highest level in two months against the Euro on Thursday, breaching 1.1600, as the single currency came under renewed selling pressure following reports that the Greek budget deficit was actually wider than initial forecasts. The UK currency received a boost, after a report from the Bank of England showed that lenders increased home loans last month, adding to signs that the UK recovery is gaining momentum.
The Pound advanced against most of the 16 most actively traded currencies and for a third day versus the Swiss Franc. A separate government report showed that UK retail sales climbed for a second month in March on gains at department stores, another sign that the recovery is gathering strength ahead of the first quarter GDP data on Friday morning.
There is still a strong element of caution over consumer spending, as the prospect of a budget squeeze after the May 6th election is still overshadowing sentiment. Consumer confidence dropped last month by the most since July 2008, while unemployment reached a 16-year high of 2.5 million in the quarter through February.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that “we’ve had this period when markets were incredibly bearish on the UK economy, and some of that has now ebbed. This should provide sterling with a degree of support.” The Pound strengthened to the strongest level against the Euro since January 29th.
The Pound came under pressure against the majors on Friday, after a report from the Office of National Statistics showed that the UK economy expanded by half as much as preliminary forecasts in the first quarter, highlighting the fragility of the recovery. Gross domestic product rose 0.2% from the final quarter of 2009, when a 0.4% expansion officially ended the recession.
The Prime Minister Gordon Brown told reporters on Friday that the economy still needs additional stimulus to avoid a “double-dip recession” and that the Conservatives’ plans to cut public spending are a “risk” to growth. The outright winner of the May 6th election will need to tackle a budget deficit that has swelled to the worst level since the Second World War in the fiscal year through March.
Stewart Robinson, an economist at Aviva Investors, said “this is disappointing. On the face of it, it’s a weak economy that got weaker in the first quarter. This number will without doubt be revised up but it won’t happen in time to help Brown.” The Pound fell 0.4% after the report, declining from the highest level in two months versus the Euro, slipping briefly under 1.15.
The kneejerk decline in Sterling sentiment didn’t last long and the Pound may strengthen to a two-month high against the U.S Dollar, after the UK currency remained above its 20-day moving average. According to Ueda Harlow Ltd, Sterling is also poised to extend gains after climbing above its 60-day moving average, a key level of resistance where sell orders may be clustered.
Toshiya Yamauchi, a senior foreign exchange analyst at the online currency trading company, said “technical charts are signaling an acceleration in rising momentum for the British currency. The currency may test $1.56 level, which represents the top of the cloud on a daily ichimoku chart.”
The political developments will also remain in focus this week and the latest opinion polls still suggest that Britain is heading perilously towards its first minority government in nearly 40-years. Sterling support will be fragile if there is continuing evidence of a deadlocked result, but selling pressure should be contained unless there are warnings over the credit rating outlook.
EUR/USD
The Euro fell to the lowest level in almost a year against the Dollar last week, after the European Union said that Greece’s deficit was worse than previously estimated, increasing the prospect of the nation accepting a bailout. Moody’s Investors Service said that it downgraded the government debt ratings of Greece to A3 from A2. The U.S Dollar rose against most of its major counterparts, amid speculation that Europe’s debt crisis will deter demand for riskier assets.
Win Thin, a senior currency strategist at Brown Brothers Harriman & Co, said that “the only surprise is that Moody’s didn’t cut more. It’s quite absurd given where we are in terms of debt numbers and the cost of borrowing. The Euro’s heavy, and people are selling into rallies.”
The Euro dropped for a sixth straight day against the Dollar, decreasing 0.6% to $1.3305, after touching the lowest level since May 7th last year. The U.S new home sales data rose in March by the most in almost five decades, while durable goods orders surged. The Euro regained some ground against the Dollar on Friday, after Greece asked the EU and the International Monetary Fund to activate a bailout of up to €45 billion.
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