The Pound continued to make gains against the Euro yesterday, while the UK currency also advanced by the most in a week versus the Dollar, after UK stocks rallied for the first time in five days, spurring demand for riskier assets.
The correlation between the Pound and aggressive swings in risk sentiment continues to dominate the market with UK banking stocks rallying, as gilts fell and BNP Paribas SA said that it will be profitable this year, reducing demand for fixed-income assets.
The revival in global stocks is supporting the Pound in the near-term and that trend may continue amid speculation that the downward move against the majors was over exaggerated and all of the bad news for Sterling has already been priced into the market.
The Pound subsequently rallied to a high of $1.4448 versus the Dollar before dropping back towards $1.4200 at the close of trading last night, but investors are still anticipating a move towards $1.4600 by the end of the third quarter.
The increased demand for British assets may continue to rise as investors take advantage of a weaker Pound, which has lost 23% in value against the Euro over the past year. While the government’s efforts to revive the economy may actually work in bringing the UK out of the worst recession in decades.
The pro-active nature of the Bank of England and the aggressive cuts in UK interest rates since October is in contrast to the European Central Bank’s stance on monetary policy. The Pound is rallying against the Euro on speculation that the economic recovery in the UK will be quicker than in the Euro-zone.
Nevertheless, the BoE has publicly stated that the impact of monetary easing is limited. Policy makers have sought government approval to create money and purchase commercial paper that may increase demand for corporate bonds denominated in Pound as appose to Euros.
Elsewhere, the Pound relinquished much of the earlier gains against the Dollar following reports that Britain had a £3.3 billion budget surplus in January, the smallest for the month in 14-years, as the financial crisis curtailed bank profits and the recession deepened.
The surplus compares with £13.9 billion a year earlier and the figures highlight the damage inflicted by the financial crisis as the Prime Minister Gordon Brown faces the biggest budget deficit since modern records began in 1970.
In terms of economic data, the focus this morning will fall on the release of the UK retail sales numbers for January and the report from the Office of National Statistics is expected to show that sales declined 0.1% on the month, as consumer’s rein in spending and unemployment rises.
The Euro rallied from near the lowest level in three months against the Dollar as speculation eased that Eastern European banking losses will deepen regional turmoil. The single currency rebounded for the first time in four days after Goldman Sachs Group Inc said that the Euro will increase more than 6% against the Dollar to $1.3500 over the coming weeks.
The Euro lost 1.7% in value against the Dollar to trade at a low of $1.2513 on Tuesday, following reports that Moody’s Investors Service raised concerns that the financial turmoil in periphery European states like the Ukraine and Poland may slow growth in the countries that use the single currency.
There is renewed optimism for the Euro amid speculation that the European Union will bail out member states in financial turmoil and there is a reduced probability of an economic break-up, which means that countries are less likely to defect away from the Euro.
The Dollar came under pressure against the majors yesterday as global stocks rallied for the first time this week, while the worsening tone of economic data pointed to a deepening recession. The Philly Fed Index showed that manufacturing output in the Philadelphia region contracted in February at the fastest pace in over 18-years.
Employment sales plummeted to the lowest level on record as the economic index dropped to a record of minus 41.3 this month, lower than initial estimates, while U.S producer prices climbed unexpectedly in January as companies tried to boost earning at the start of the year, amid weakening demand.
Data Released 19th February
U.K 09:30 Retail Sales (January)
EU 08:58 Flash PMI – Composite (February)
- Manufacturing
- Services PMI
U.S 13:30 Consumer Price Index (January)
- Ex Food & Energy
U.S 13:30 Real Earnings (January)
written by Adam Solomon
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