The Pound bounced back against the Dollar yesterday, snapping a seven day losing streak to breach the $1.6000 level by the close of trading last night, while the UK currency also registered gains versus the Euro after rising equity and commodity markets bolstered demand for Sterling.
A modest revival in the UK stock market saw the FTSE 100 Index jump as much as 4.7% yesterday, while crude oil prices also bounced over 2% higher, and the Pound’s relative strength index signalled that it was poised to rebound versus the Dollar after falling to the lowest level in five years.
The strong correlation between currencies and equities has become all too apparent of late and the gains in equity markets yesterday brought a renewed appetite for risk back into the market as traders bought back into the high yielding currencies amid signs of an economic recovery.
That sentiment was also reflected in the performance of the Japanese Yen yesterday, which declined 4.8% versus the Pound from Monday to record the largest downward move since at least January 1971.
The Pound slumped to a low of $1.5279 on Monday but the UK currency enjoyed a strong intraday surge against the its U.S counterpart, after sliding more than 10% in value in October alone.
The big question is whether the Pound will be able to sustain this momentum beyond the short-term, particularly considering the heightened sense of speculation that the Bank of England will implement a 100 basis point reduction in interest rates next week.
In addition, a recent report from the Office of National Statistics showed that UK economic growth contracted 0.5% in the third quarter as the economy drifts towards the first recession since 1992.
The deputy governor of the Bank of England John Gieve said in a speech yesterday that financial markets are under “acute” strain and the recent falls in equity and corporate bond prices is affecting long-term institutional investors, including hedge funds.
The slump in housing has seen the number of foreclosures jump 71% in the second quarter as higher interest rates made it harder for property owners to pay off their mortgages.
Investors and traders have stepped up bets that the Bank of England will cut its main interest rate on November 6th but the Prime Minister Gordon Brown hinted on Monday that the Central Bank may be forced into another coordinated round of cuts this week.
The Euro struggled to stem the losses against the Dollar yesterday, dropping to the lowest level in more than two years, while the single currency also relinquished earlier gains against the Pound following speculation that the ECB will also cut interest rates as the global credit crisis pushes the economy closer towards contraction.
In addition, the Euro slumped for a third straight day as a report in Germany is expected to confirm that consumer confidence in the region’s largest economy will fall to the weakest level since June 2003 and the ECB President said yesterday that policy makers may cut borrowing costs next week.
Europe’s economy stands on the brink of recession with growth in manufacturing and service industries contracting at a record pace in October, while the Ifo index showed business confidence slumped to a five year low.
Despite making further gains against the Euro, the Dollar succumbed to a revival in global stocks as the Dow Jones Industrial Average recorded its second best point gain in 23 years, which encouraged investors that credit markets are stabilising.
In terms of economic data, U.S consumer confidence dropped to a record low and house prices in 20 U.S cities continued to fall from this stage in 2007, while the focus will switch to the FOMC rate announcement this evening where policy makers are forecast to lower borrowing costs from the current 1.5%.
Data Released 29th October
U.K 09:30 Consumer Credit (September)
U.K 09:30 Mortgage Applications (September)
U.S 12:30 Durable Goods Orders (September)
U.S 18:15 FOMC Rate announcement
written by Adam Solomon
