The Pound declines against the Dollar, after disappointing quarterly results from BP Plc saw stocks decline for the first time in 12 days


By on July 29th, 2009.
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GBPEUR/GBPUSD

The Pound advanced against the Dollar yesterday and challenged so-called resistance levels near $1.6550 in London, as global stocks rallied for a 12th straight day. Standard Chartered Plc also raised its forecast for the UK currency and the Pound subsequently rallied to its highest level in three days versus the U.S Dollar and recorded a high of 1.16 against the Euro.

The FTSE 350 Banks Index of British financial stocks rose to levels not seen since December and UK stocks were on course for a record winning streak, led by Lloyds Banking Group Plc and Sage Group Plc. The FTSE 100 added another 0.4% in London and the benchmark for UK equities has climbed for 12 successive days, the longest winning streak since 1984, as a record number of U.S companies beat analysts’ earning estimates.

The FTSE 100 has rebounded 31% since March 3rd, amid speculation that the worst of the global recession is easing. Lloyds Banking Group Plc climbed 4.1%, after naming Win Bischoff as chairman to replace Victor Blank, who is retiring. However, UK stocks slid 0.6% in New York, as the FTSE 100 Index failed to hold on to its longest winning streak on record.

Shares in BP Plc dropped after saying that profit shrunk 53% in the last quarter and that there is “little evidence” of a recovery in demand. A positive close last night would have pushed the measure to a record 12th straight advance and the Pound declined against the majority of the major currencies, as risk appetite subsided.

The performance of the Pound yesterday perfectly illustrates the correlation between stock market sentiment and risk appetite and the UK currency relinquished earlier gains, after the FTSE 100 failed to rally for a 12th straight day. The benchmark of UK equities has still rebounded 30% since the low on March 3rd, amid speculation that the worst recession since the Second World War is abating.

The Pound fell back towards $1.6350 against the Dollar last night but bounced back from lows against the high-yielding currencies, as an element of risk aversion crept back into the market. Nevertheless, Standard Chartered Plc said yesterday that the Pound will reach $1.70 against the Dollar in the third quarter and $1.75 by year-end.

Jeremy Stretch, a senior currency strategist at Rabobank International, said that “equities and risk appetite continue to be the main driving factor of the market. There are some signs of cautious optimism coming in.” The Pound may also rally to the highest level in a year against the Japanese Yen, after UK bond yields rose to the highest among the Group of Seven nation for the first time since October.

Bank of England policy maker Andrew Sentence said last week that the central bank may pause its £125 billion bond purchasing program, if officials determine that they have done enough to bolster the economy. Stretch also stated that “if we can see a degree of normality coming back into monetary policy in the next year, sterling will gain traction.”

The Pound will remain susceptible to swings in risk sentiment but there is also speculation on what the Bank of England will do on August 6th. Any indication that they will extend the quantitative easing program to November will severely undermine confidence in the UK currency but a move back towards conventional policy techniques would propel the Pound towards the yearly highs against the Dollar and the Euro.

In terms of economic data, UK house prices rose for the first time in 17-months in June, led by gains in London. The report from the Land Registry showed that the average price of a home in Britain increased 0.1% from the previous month, the first gain since January 2008. The report adds to recent evidence that the property market is stabilising, while the economy remains entrenched in a serious recession.

Elsewhere, the latest CBI retail sales survey recorded a modest improvement on the month, and although investors had expected a slight larger gain, the data suggests that consumer spending is still holding relatively firm. However, overall confidence is still liable to be fragile given the massive UK debt burden.

EUR/USD

The Euro continued to test upper resistance levels against the Dollar yesterday and pushed towards levels around $1.43 in early Europe. U.S consumer confidence weakened modestly to a level of 46.6, from 49.3 the previous month. This was the second successive decline and reflected a surge in unemployment that threatens to undermine household spending.

Stocks slumped and Treasuries rose after the report, as consumer spending accounts for roughly 70% of U.S gross domestic product, and any renewed decline would temper a recovery in the economy. The Standard & Poor’s 500 Stock Index tumbled 0.8% and the Dollar subsequently rallied as traders sought the security of relative safe haven assets.

Overall risk appetite was generally weaker through the course of the day and the Euro failed to advance against the Dollar, amid speculation that Latvia had devalued its currency. In this environment, the Dollar recovered from the lowest levels in seven weeks and held steady around the $1.42 level ahead of the data released today.

Data Released 29th July

U.K 09:30 Consumer Credit (June)

U.K 09:30 Mortgage Applications (June)

U.S 13:30 Durable Goods Orders (June)

U.S 19:00 Federal Reserve Publishes Beige Book

written by Adam Solomon

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