The Pound rallied against the Euro for the first time in seven days yesterday, while the UK currency also continued the surprising upside momentum versus the Dollar, rising to a high of $1.4240 in London, as concerns eased about the amount of money required to bailout UK banks.
The slump in banking stocks has increased speculation that the government will move to nationalise Barclays Plc and Royal Bank of Scotland Plc but the Pound rallied form a three week low as UK banking stocks gained for a second day yesterday and the cost of protecting their bonds from defaults fell.
Shares in Barclays Plc rallied by the most in twenty years on Monday and a statement from the bank’s CEO on Tuesday said that it won’t need funding from the government because revenue increased exponentially from the North American acquisitions of Lehman Brothers Holdings Inc.
There is a strong correlation at present between the Pound’s performance and banking sentiment and the revival in share prices has seen the UK currency rally from a three month low versus the Euro and peak above $1.4300 versus the Dollar this morning but the tentative swings in risk could see Sterling come under renewed selling pressure over the coming days.
Therefore, it would be quite prudent for Euro and Dollar buyers to consider placing a stop order in the market to protect against an adverse retracement back towards the support at $1.3505 versus the Dollar and 1.0580 against the Euro, particularly considering the tone of UK housing data released this week.
The Euro continued to make gains against the Dollar yesterday as the renewed appetite for risk reduced the U.S currency’s appeal as a haven, while the single currency also benefited from an unexpected upturn in German business confidence as the Ifo index of investor and analyst expectations rose for the first time eight months.
The European Central Bank’s decision to cut interest rates aggressively since October has boosted sentiment, while the German government doubled its economic stimulus package to fight the recession that has ravaged the economy following the worst financial crisis since the Great Depression.
Chancellor Angela Merkel’s coalition agreed this month to input in the region of €80 billion over the next two years in another attempt to halt the worst economic slump since the end of the Second World War as the International Monetary Fund expects the German economy to contract 2.5% in 2009.
The government’s spending package will amount to roughly 1.6% of Euro-zone gross domestic product, the biggest stimulus package in European history, and business confidence has improved as commodity prices continue to tumble with oil dropping 70% in value from the July peak of $147.27 a barrel.
Nevertheless, the surprising increase in the Ifo sentiment index at least provides some optimism but it doesn’t necessarily mean that the worst is over and the economic outlook for the Euro-zone remains for the economy to shrink in the first and second quarters of 2009 with a possible recovery in the third.
The ECB’s governing council has cut interest rates to equal a record low of 2.0% on four occasions since October and earlier this month the chairman, Jean Claude Trichet, signalled another likely reduction in March but the Bundesbank president and staunch hawk Axel Weber has reiterated his reluctance to cut below the 2.0% ceiling.
Weber also said yesterday that he expects the recession in Germany to precede a period of stabilization after the first quarter with an economic revival in 2010 and his comments will support the Euro and increase speculation that the Central Bank is nearing the end of its rate cutting cycle.
The rising appetite for risk continued to weigh on the Dollar yesterday but the U.S currency reversed earlier losses in New York after a report showed that consumer confidence unexpectedly declined to a record low in January, increasing the appeal of the Dollar as a relative safe haven currency.
By the close of trading last night, the Dollar had bounced from a one week low against the Euro to stand 0.2% higher on the day as the Conference Board’s index of confidence fell to a reading of 37.7, from a revised 38.6 in December as companies continue to shed workers as sales plummet.
Caterpillar Inc and Home Depot Inc were among several companies this week who said that they will cut at least 74,000 workers from payrolls over the coming months and President Barack Obama is trying to increase support for a quick passage of an unprecedented stimulus plan aimed at creating jobs, cutting taxes and boosting infrastructure spending.
The focus today will fall on the FOMC interest rate announcement this evening and policy makers are expected to maintain the target lending rate in a range between zero and 0.25% as the focus swtiches to the tone of the accompanying statement where the Central Bank may broaden the range of assets it will purchase to unfreeze credit markets.
Data Released 28th January
U.S 19:15 FOMC Rate Announcement
written by Adam Solomon
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