by Adam Solomon
GBPEUR/GBPUSD
The Pound staged a modest recovery against the U.S Dollar in the foreign exchange markets yesterday, bouncing back from a one-month low of $1.5850, as UK stocks rose for a third straight day, driven by gains in mining shares. The UK currency remained largely unchanged against the Euro, after earlier falling towards 1.1410 in London.
Rio Tinto Group led basic resources producers higher, after Citigroup Inc advised its clients to buy shares in the world’s third largest mining company. The benchmark FTSE 100 Index advanced 0.1% on the day, after earlier falling as much as 0.8%. The gauge has dropped 2.9% so far this year, as the U.S government imposed sanctions on risk taking by banks and China moved to restrict lending to cool the economy.
The FTSE 100 Index is still 50% higher than at its lowest point in March last year, after government and central banks around the globe embarked on a policy to maintain record low interest rates and commit more than $12 trillion to stimulate the world economy. The correlation between the Pound’s performance against the Dollar is still largely correlated with the performance of the stock market but it is unlikely to last.
Over the past 18-months, central banks have been forced to adopt emergency stimulus measures, which has made stock and commodity markets all the more attractive to investors and increased appetite for higher-yielding assets. However, the asset bubble may be about to burst, as government’s withdraw stimulus and revert back to conventional monetary policy.
The Pound remained largely subdued for the majority of the day yesterday, lacking any real market direction, amid a fundamental lack of economic data. An index of UK construction activity showed the slowest pace of contraction in almost two years in January, as the economy stuttered back towards growth following the worst recession on record.
The gauge of building activity was at a level of 48.6 in January, compared with 47.1 in December, the highest reading in 23-months. Colin Ellis, an economist at Daiwa Capital, said that “the construction sector has been very hard hit by the recession and the collapse in housing activity. The data suggested that, while construction remains under the cosh, the pace of construction is easing.”
The UK economy stumbled out of the recession in the fourth quarter, largely due to a short-term recovery in house prices and improved lending conditions. The Bank of England will this week probably pause its unprecedented bond purchasing programme, after spending £200 billion on government and corporate debt.
EUR/USD
The Euro rallied back towards $1.3950 against the Dollar yesterday, as investors turned away from the greenback in favour of higher-yielding assets. European producer prices dropped to an annual basis for a 12th straight month in December, the longest stretch of declines in a decade, after the recession prompted companies to cut costs and eliminate jobs.
Factory-gate prices in the Euro-zone fell 2.9% from a year earlier, after a 4.4% drop in November, and manufacturers may struggle to raise prices as increasing unemployment curbs demand and companies continue to reduce costs. The European Central Bank believes that prices will remain subdued over the coming months and will not need to raise interest rates any time soon.
Analysts at Citigroup Inc have predicted that the Euro may face a “correction” that will drive the single currency to its lowest level since May, after closing below the so-called support at $1.3981. Tom Fitzpatrick, a technical analyst in New York, said that “a 10 percent correction down in the euro from the November high takes the pair to $1.3630 where further support levels converge. Overall further short-term weakness down to the $1.36 plus area would not be surprising.”
Data Released 3rd February
U.K 00:01 BRC Shop Prices (January)
U.K 00:01 Nationwide Consumer Confidence (January)
U.K 09:28 CIPS Services PMI (January)
EU 08:58 Markit Services PMI (January)
- Composite PMI
EU 10:00 EC’s Economic Forecasts
EU 10:00 Retail Sales (December)
U.S 13:15 ADP Employment (January)
U.S 15:00 ISM – Non-Manufacturing PMI (January)
