GBPEUR/GBPUSD
The Pound rallied back against the Dollar yesterday, rising towards the resistance level at $1.6551 overnight, while the UK currency also made tentative gains versus the Euro, after a report showed that UK house prices climbed in July for a third straight month. According to the report from Nationwide Building Society, house prices increased for a third straight month in July, as a shortage of supply helped shield the property market from the worst recession in a generation.
The average cost of a home in Britain rose 1.3% to £158,871, after rising 1% in June, while economists had predicted a modest 0.2% increase. From a year earlier, prices fell 6.2%, the smallest annual drop since May 2008. The report adds to signs that the UK housing market may be starting to recover, as the economy emerges from the worst recession in at least three decades.
Investec Securities in London said yesterday that the Bank of England will decide next week to pause its bond-purchasing program at £125 billion, as inflationary pressures arise and spur speculation that policy makers may increase interest rates from the lowest level on record. Any such move to end the quantitative easing program would tend to propel the Pound towards the highest levels this year but should policy makers decide to extend the program to November, Sterling will come under significant selling pressure.
Philip Shaw, chief economist at Investec, said yesterday that “we are surprised by the scale of this increase” in house prices. “There appears to be more confidence in economic prospects and interest rates are close to zero. The Monetary Policy Committee will play wait-and-see.” Shaw had previously expected policy makers to increase spending on the easing program to the maximum £150 billion authorised by the Chancellor Alistair Darling.
The Pound rose 0.7% against the Dollar following the housing data and rallied for a third straight day versus the Euro. House prices have now risen 2.6% in the three months through July, the most since February 2007, compared with 1% growth in the period through June. Martin Gahbauer, chief economist at Nationwide, said that “house prices have been remarkably resilient this year, despite a recessionary economic background with sharply rising unemployment.”
Former Bank of England policy maker Stephen Nickell said yesterday that Britain needs to build 3% more homes than estimated last year because the recession has hit homebuilding. A report earlier this week showed that UK mortgage approvals rose to the highest level in 14-months in June, while house prices rose 1.3% in the first seven months of 2009.
The UK economy contracted 0.8% in the second quarter, after it shrank 2.4% in the previous three months. Central Bank policy maker Andrew Sentence said last week that there may be “some evidence of positive growth in the second half of the year, and the bank may shift to a “watching” stance on their plan to ease credit strains in the economy.
Daragh Maher, deputy head of global foreign exchange strategy at Calyon, said that “there is underlying demand for sterling, which means that when you get a good number, the market is pretty quick to come in and start buying afresh.” The Pound is 0.2% highest against the Dollar in July, remaining on course for the fifth consecutive monthly gain. The UK currency has fallen 0.1% against the Euro, after rising for the previous three months.
Signs of a recovery in the UK economy have helped the Pound advance 13% against the Dollar year and 12% versus the Euro. The Office of National Statistics said on July 23rd that UK retail sales rose 1.2% last month, four times as much as economists had predicted.
The Pound was also supported by the underlying increase in risk appetite, as the UK FTSE 100 Index of stocks advanced for a second straight day, led by BT Group plc and Rolls-Royce Group Plc. Stocks rallied to the highest level since January and have recorded gains in thirteen out of the last 14-trading days, the longest stretch of gains since 2004.
BT soared 13% after the largest UK fixed-line company reported net income in the three months through June that beat initial forecasts and the benchmark FTSE 100 Index climbed 1.9%. The measure has surged 12% since July 10 after a host of U.S companies, including Goldman Sachs Group Inc, posted quarterly results that exceeded estimates. The U.S Federal Reserve Chairman Ben Bernanke also said that the economy is showing “tentative signs of stabilisation.”
EUR/USD
The Dollar was unable to sustain any upward momentum against the Euro yesterday and was trapped in tight ranges as markets struggled for direction. There was a seasonally adjusted decline in German unemployment for July, although the underlying figures reported a small increase. There was also a further recovery in industrial and consumer confidence, according to the latest Euro-zone survey.
An index of business and consumer confidence in the Euro-zone rose to the highest level since November in June, adding to signs that the deepest recession in more than 60-years may be bottoming out. The growing confidence is just the latest evidence that Europe may have seen the worst of the recession, as indications of a global recovery improve prospects in the region.
The International Monetary Fund said yesterday that the Euro was overvalued by roughly 15% and has put some near-term downward pressure on the currency, although the impact was transitory. In the U.S, initial jobless claims increase to 584,000 in the latest week, from a revised 559,000 the previous week. The GDP data will be watched closely this afternoon and will have an important impact on risk appetite.
Data Released 31st July
EU 10:00 HICP Flash (July)
EU 10:00 Unemployment (June)
U.S 13:30 Gross Domestic Product (Q2)
– Deflator
U.S 13:30 Employment Cost Index (Q2)
U.S 14:45 Chicago PMI (July)
written by Adam Solomon
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