GBPEUR/GBPUSD
The Pound weakened slightly against the Dollar yesterday, but the UK currency made impressive gains versus the higher-yielding currencies like the Australian Dollar and South African Rand, as stocks slumped for a seventh consecutive day. Commodities also declined as global risk appetite waned and the MSCI World Index dropped 0.6%.
Sterling maintained its advance against the Euro for a third straight day, rising above 1.11 in London, after declining 1.9% following the GDP report last week. The FTSE 100 Index slid 1.5%, as reports from a number of financial institutions disappointed investors, and speculation increased that regulators may force banks to break up to strengthen balance sheets.
The FTSE 100 has retreated to a three-week low this week, as concern increases the seven month rally may have taken share prices too high relative to prospects for earnings growth. The gauge is still up 46% from this year’s low on March 3rd and the global decline in risk appetite has encouraged investors to seek the security of safe haven assets in favour of low cost loans in Japan.
Copper dropped for a third straight day, while oil and gold prices also declined. Peter Frank, a currency strategist at Societe Generale SA, said that “we’ve had a bit of risk aversion in equity markets. The Pound isn’t looking as if it could outperform the Dollar or the Yen in a risk averse situation.” The Pound fell 0.2% against the Dollar yesterday to $1.6330 in London.
The increase in risk aversion helped Sterling appreciate over 2% against the Australian Dollar to 1.8220 and almost 3% in value versus the South African Rand. Sean Maloney, a fixed-income strategist at Nomura International Plc in London, said yesterday that “we’ve had a move upwards in all the markets and perhaps we’re taking a bit of stock ahead of the supply we’ve got coming up in the five-year auction in the U.S.”
The Bank of England’s Monetary Policy Committee will decide on November 5th whether to extend the £175 billion bond purchasing plan, as the UK economy languishes in the worst recession on record. Frank at Societe Generale SA, said “that really is the key to whether the Pound is going to rally or not. The leading indicators are beginning to turn up.”
Governments and Central Banks around the world are preparing to remove stimulus measures, after spending a total of $12 trillion, by International Monetary Fund estimates, to drag the global economy out of recession. Separately, the Land Registry said on its website yesterday that UK house prices rose 0.9% in September.
The Pound has risen sharply against the Euro this week and it will be interesting to gauge whether the UK currency can sustain this momentum going into next week. The rate announcement on November 5th is shaping up to be hugely significant in determining Sterling sentiment over the coming months, Euro and Dollar buyers may wish take advantage of the current rate or at least place a stop order.
EUR/USD
The Dollar and the Japanese Yen gained against most of the 16-most actively traded currencies, amid speculation that an unexpected decrease in U.S new home sales dampened demand for higher-yielding assets. Sales of new homes decreased 3.6% to a 402,000 annual pace, lower than preliminary estimates, a sign that the housing recovery may lose its momentum.
The Dollar has posted its longest rally against the Euro since mid August, rising for a fourth consecutive day, on evidence that housing is declining and mortgage applications fell 12% to a two month low. Global investors have much less tolerance for riskier assets than they did before the global financial crisis, and a sustained decline in the stock market is supporting Dollar sentiment.
The Australian Dollar declined against the U.S Dollar and the majority of the major currencies, following reports that inflation slowed in September. The fall in consumer prices will ease speculation that the Reserve Bank of Australia will speed up interest rate increases. The decline in stocks and commodities is also weighing on the Australian Dollar, as traders move away from riskier assets.
Data Released 29th October
U.K 09:30 Mortgage Applications
EU Economic Sentiment (October)
– Industrial / Consumer / Services
GER 09:00 Unemployment (October)
U.S 12:30 Advanced GDP (Q3)
– Deflator
U.S 12:30 Initial Jobless Claims (w/e 24th October)
written by Adam Solomon
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