The Pound rallied to the highest level against the Dollar in two weeks yesterday, touching a high of $1.4650, before retreating back under $1.4500 at the close of the European session, while the UK currency also advanced against the Yen and the Euro amid speculation that banks are stepping up efforts to shore up their finances.
With the fundamental lack of economic data released, the focus switched back towards global stock markets and UK banking stocks gained after the Royal Bank of Scotland Group Plc released a statement, saying that it plans to cut costs by over £1 billion.
The UK’s largest state controlled lender plans to split itself into two units and will reduce investment banking, while the Wall Street Journal reported that the U.S government may increase its holding in Citigroup Inc as the FTSE 100 Index jumped as much as 4.5% in early trade.
The buoyant mood in equity markets and the renewed appetite for risk sentiment drove the Pound higher against the majors with the UK currency touching a high of 1.1454 against the Euro. However, the Pound’s resilience will be surely be tested later this week, before a report that may show the UK economy contracted in the fourth quarter, increasing the likelihood for a further reduction in borrowing costs.
The fourth quarter estimate for UK gross domestic product will probably show that the economy contracted 1.6% in the three months through December as the financial crisis intensified. However, the Pound may receive a boost should the government announce plans this week to insure banks against the losses on their assets.
Economists at Credit Suisse Group AG are speculating that the Pound could reach $1.4900 against the Dollar over the coming weeks but the tentative movement in global stocks could easily reduce the allure of Sterling. Dollar and Euro buyers would be well placed to take advantage of the current upside momentum or at the very least place a stop order in the market to protect against a possible retracement.
The Pound may come under some pressure as a report from the Confederation of British Industry may provide further evidence of the pessimism surrounding the retail sector, while UK homebuilders may announce a further £1.63 billon if writedowns to land holdings this year after falling prices all but wiped out profit margins.
The Euro was unable to sustain the recent gains made against the Dollar and weakened substantially during the European session yesterday, dropping a low of 1.2700 yesterday, as the single currency was undermined following comments from the ECB Chairman Jean-Claude Trichet, who said that the Euro-zone banking system was under severe strain.
His comments will reinforce concerns surrounding the prospect of an economic recovery in the region and the Euro may come under further selling pressure today amid the release of the German Ifo sentiment index this morning.
The index of business confidence in Europe’s largest economy is expected to remain unchanged in February amid the government’s stimulus program and interest rate cuts that have thus far failed to bolster sentiment, as lawmakers agreed last week to more than the double the fiscal package to roughly €80 billion.
The Dollar declined heavily against the Pound yesterday as global stocks rallied higher, while the U.S currency may come under further pressure today amid the release of the S&P;/ Case Shiller index of house prices, which will probably show that prices declined 18.3% year-on-year in December.
The severity of the housing slump has pushed the U.S economy further into a recession and the Dollar may struggle to recover as the report will show the biggest annual decline since records began in 2001, while a separate report may show that U.S consumer confidence slipped to a reading of 35.2 in February.
Elsewhere, the chairman of the Federal Reserve Ben Bernanke is poised to deliver his semi-annual testimony to Congress this afternoon and economists will look to assess his stance on possible moves towards buying government debt and long-term inflation targets.
Data Released 24th February
U.K 11:00 CBI Distributive Trades Survey (February)
EU 10:00 Industrial Orders (December)
GER 09:00 Ifo Index (February)
U.S 14:00 Case Shiller House Prices (December)
U.S 15:00 Consumer Confidence (February)
written by Adam Solomon
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