GBPEUR/GBPUSD
The Pound briefly traded above 1.6000 versus the U.S Dollar for the first time in nearly seven months, while the UK currency also rallied to a high of 1.1544 against the Euro, amid increased optimism that the worst of the recession is over, stoking demand for British denominated assets. Sterling extended its rally throughout the course of the day, from a 23-year low reached in January, to 19% as the FTSE 350 Banks Index moved higher.
The UK currency appreciated as much as 1%, to a high of $1.6078 versus the Dollar, the highest level since November 5th, while the Pound climbed 1.4% versus the Euro. Brian Kim, a currency strategist at UBS AG said that “the pound is having a correction after being hammered hard last year. There’s some valuation argument.”
The 19% drop in the Pound’s value against the Dollar over the past year has made the UK currency more attractive to investors, who think that additional government stimulus packages will drag the economy out of its current slump. Almost a quarter of the 220 fund managers surveyed by Bank of America in May said that the Pound is undervalued at its current level.
From a technical perspective, the Pound climbed almost 2% since it broke through its 200-day moving average versus the Dollar on May 20th, a sign that investors who use charts to plot currency moves that sterling will extend its advance. David Powell, a currency strategist at Bank of America, said that “the view that sterling is gaining ground is becoming more prevalent.”
The Pound has also gained 3.3% in value against the Euro in May and according to economists at Bank of America, the UK currency may appreciate to 1.1764 against the Euro by year-end, as we tentatively approach the yearly high of 1.1574. The Pound may also rise against the Euro because its decline during the financial crisis wasn’t justified, when considering the difference in interest rates.
Elsewhere, the Pound stood firm yesterday despite reports from the Nationwide Building Society, which said that UK house prices may keep falling for the rest of the year, as unemployment continues to rise higher. The UK economy will remain entrenched in a recession for the remainder of 2009, while the recovery next year is expected to be ’slow’ and ‘protracted’.
The rising jobless rate is a major concern for the government and unemployment may continue to rise next year because the labour market will lag behind any developments in the broader economy. Building societies, which account for about 18% of the UK mortgage market, are facing rising defaults, as the country struggles with its worst recession since the Second World War.
Moody’s Investors Service cut its rating on eight customer-owned lenders, including Nationwide, in April on expectations of increased credit losses. UK house prices are forecast to fall 14% this year, denting hopes that we’re through the worst of the recession. However, price declines have slowed in recent months, though it’s too early to say whether we have reached a turning point.
UK banks have granted more mortgages in April than the previous month, a sign that the property market may be stabilising. The UK mortgage market contracted last year and will probably shrink again this year, as net lending fell to £2.1 billion, from £8.9 billion a year earlier. In terms of economic data, the focus this morning will fall on a report from the Confederation in British Industry but the Pound may continue to make gains, providing global risk appetite improves.
EUR/USD
The Dollar gained for a second consecutive day versus the Euro, after the Treasury’s record-equalling $40 billion sale of two-year notes yesterday drew the most demand since November 2006, from a group of investors that includes foreign central banks. The U.S government auctioned $35 billion in new five-year securities yesterday.
The U.S currency weakened back above $1.4000 versus the Euro first the first since January, amid concerns that the U.S credit rating deteriorated as the budget deficit swelled. The government’s credit rating currently has a stable outlook and demonstrates the attributes of a AAA sovereign. The headline U.S economic data was close to expectations, as existing home sales rose to an annual rate of 4.68 million in April.
Although there is evidence of a revival in interest for foreclosure related properties as prices decline, the rise in inventories will dampen expectations of more than just a limited recovery in the housing sector. The focus today will fall on U.S durable goods orders and new home sales, both of which are expected to show some modest improvements on the month and that may hurt the Dollar, diminished its appeal as a haven.
Data Released 28th May
U.K 11:00 CBI Distributive Trades Survey (May)
EU 10:00 EC Business Climate Index (May)
EU 10:00 EC Economic Sentiment (May)
– Consumer / Industrial / Services
GER 09:00 Unemployment (May)
U.S 13:30 Durable Goods (April)
U.S 13:30 Initial Jobless Claims (w/e 23rd May)
U.S 15:00 New Home Sales (April)
written by Adam Solomon
