GBP/USD GBP/EUR
The Pound rallied to a one-month high versus the Dollar yesterday, as the UK currency continued to gain support from the overall improvement in risk appetite, with improved sentiment towards the banking sector also a key supportive factor.
The Pound peaked at $1.4650 versus its U.S counterpart, after UK stocks rallied for the third day in succession, led by banks, amid renewed optimism that the Federal Reserve’s plan to expand the financial rescue package will revive lending conditions.
The President of the United States Barack Obama and his administration are scheduled to announce the details of the plan to expand upon the $700 billion rescue package today. The U.S Treasury Secretary Timothy Geithner is set to unveil the plan that will partly rely upon private investors to buy ‘bad’ debt and refinance bank’s balance sheets.
Lloyds Banking Group Plc rallied 11% in London and Royal Banking of Scotland Group Plc rose 4.2%, as the U.S Treasury announced a plan aimed at injecting as much as $1 trillion in purchases of toxic assets. Barclays Bank Plc also surged 16% on the session, amid speculation that Hellman & Friedman LLC will bid for its ishares unit, along with a group of private equity firms.
The FTSE 100 Index rose a further 2.9% and the revival in risk appetite with continue to be supportive to Sterling in the near-term, as the UK currency also advanced against the Euro, rising to a high of 1.0776 over night.
However, Lauren Rosborough, a currency strategist at Westpac Banking Corp, said yesterday that “the market is somewhat short sterling and Britain’s currency may resume its decline against the Dollar in the medium term as the global economy deteriorates.”
The Pound declined heavily against all of the 16-most actively traded currencies, after the Bank of England announced last month that it will begin printing money and pumping it into the economy through a policy known as quantitative easing. UK bonds fell yesterday but further declines may be limited, as the BoE steps up the purchase of gilts in an attempt to revive the economy.
The Central Bank is expected to buy £2.5 billion of gilts today, after it bought £5 billion of bonds last week. The Pound stood firm yesterday and continued the upside momentum against the Dollar, despite comments from the outgoing Bank of England policy maker David Blanchflower.
Blanchflower, who voted for a rate cut at every meeting since October, reiterated his call for a government stimulus package to revive the UK economy, citing the risks that the number of people out of work and receiving jobless benefits will exceed 3 million later this year, as the recession deepens.
A recent report from the Office of National Statistics showed that UK unemployment rose by the most since records began in 1971 last month, as the UK economy sank into the worst contraction since 1980. The Prime Minister Gordon Brown has pumped hundreds of billion of Pounds in the financial sector, in a vain attempt the halt the decline, while policy makers have slashed borrowings costs to lowest level on record.
In a statement to Parliament, Blanchflower said that “forecasters in a recession tend to be overly optimistic” and “the worry is that any forecast we do have of unemployment or output, the likelihood in a recession is that we’ve undercooked”.
His comments yesterday are in stark contrast to a statement released by the Confederation of British Industry, who said that the government should avoid a further budget giveaway because the public finances are in an “alarming state”.
The focus today will fall on the tone of the comments from the Bank of England governor Mervyn King, for further evidence on the economic trends and a pessimistic tone would risk renewed selling pressure on the Pound. In terms of economic data, a weak report this morning on UK consumer prices could also increase concerns over deflation. The retail price index is likely to dip to significantly below zero but the Pound will gain support is global stock markets continue to gain.
EUR/USD
The Euro is fast-becoming the currency of choice for investors, after the Fed’s actions last week devalued the Dollar and caused a revival in risk appetite. The European Central Bank President Jean-Claude Trichet has been widely criticised for failing to keep up with efforts to stem the recession.
However, the ECB’s reluctance to use less conventional tools to revive the economy, while the Federal Reserve and the Bank of England undertake quantitative easing measures, means that traders are now glad that the Central Bank are behind the curve and have bought the Euro as an element of risk appetite returns.
Trichet suggested that there was further scope to cut interest rates next month, but also expressed doubts over the potential to cut rates to zero. In the statement yesterday, he also indicated that there will be resistance to utilise any further non-conventional measures.
The single currency has strengthened 7.7% in value against the Dollar this month, after tumbling 9.3% in the first two months of the year. JP Morgan & Chase Co, Morgan Stanley and Citigroup Inc are all advising investors to step up their purchase of Euros.
Investors are ignoring reports from the European Union that the economy will contract 3.3% this year, and are snapping up currencies where Central Bankers are resisting calls to purchase government or corporate debt, as a way of lowering interest rates and pump money into their financial systems. These options are becoming increasingly scarce after the Federal Reserve joined the Bank of England, Bank of Japan and Swiss National Bank in quantitative easing.
John Normand, Head of currency strategy at JP Morgan in London, said that the Euro will probably rise 2.8% against the Dollar to $1.4000 in a month, after soaring 5.1% in value over the past week. “the top on Euro-Dollar will come when the ECB looks likely to join the quantitative easing crowd”.
The Dollar found little support against the majors yesterday, as a rebound in global stocks diminished the allure of safe haven currencies. The U.S currency also failed to make gains, despite reports that existing home sales unexpectedly climbed in February, as a record number of foreclosures encouraged buyers into the market to take advantage of lower prices.
Data Released 24th March
U.K 09:30 Consumer Price Index (February)
– Retail Price Index
EU 08:58 Flash PMI: Composite
– Manufacturing / Services
EU 10:00 Industrial Orders (January)
written by Adam Solomon
