GBPEUR/GBPUSD
Following on from last week, the Pound rallied against the Dollar on Friday, finding support around $1.6400 before improving steadily through the course of the day to challenge resistance levels above $1.6500. The UK currency also rose back towards 1.1750 versus the Euro, as improved economic data in the U.S spurred demand for riskier assets such as stocks priced in Sterling.
The FTSE 100 Index swung between gains and losses throughout the course of last week, as global risk appetite deteriorated and investors returned to the relative security of dollar denominated assets.
The benchmark FTSE 100 Index declined 0.6% to 4,252.57 in London and the stock market has decreased 5.6% from June 1st, amid speculation that share prices have outpaced the outlook for earnings growth after the gauge reached 30.7 times its companies earnings.
In the FOMC statement on Wednesday, policy makers doused speculation that it will pump more money into the economy to hold down interest rates. The Pound was able to avoid a test of key technical support in the $1.6200 region and rallied back towards $1.6400 in New York on Thursday, as volatile trading conditions persisted. The UK currency also found key support under 1.1670 against the Euro, as there were no economic factors or official comments to guide the Pound during the course of the day.
The UK currency also fell against the Swiss Franc and the Australian Dollar, as the FTSE 100 index slipped 1.6% in London, the most in three days. The Pound was also unsettled to some extent by concerns surrounding fiscal debt, amid comments from the Bank of England governor Mervyn King on Wednesday, but the impact faded during U.S trading as equity markets rallied.
There will be a much greater chance of a change in sentiment if there is a sustained deterioration in global risk appetite. Confidence held relatively firm in early Europe on Friday and this helped Sterling hold near the $1.6400 level against the Dollar. King said on Wednesday that the U.K’s path out of recession may be a “long, hard slog”.
Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd, said that “the market’s positioned long sterling and lower equities provide a good excuse to take some profit. The Pound hasn’t performed since Mervyn King spoke on Wednesday.” Kings comments have clearly weighed on Sterling sentiment, while the Organisation for Economic Cooperation and Development said that the UK gross domestic product will drop 4.3% this year.
The Pound snapped a two-day decline versus the Dollar on Friday, as the FTSE 100 Index of shares rebounded as much as 1.3%, before erasing earlier gains. The FTSE 350 Banks Index rose as much as 1.7% and the Pound’s correlation with the banking gauge has been 79% or higher this year. Consumer spending in the U.S climbed in May for the first time in three months.
Ian Stannard, a foreign-exchange strategist at BNP Paribas SA, said “we have risk appetite re-emerging, which is sterling positive. There’s still quite a lot of negative sentiment toward the fiscal and debt position of the UK, which has been highlighted this week by policy makers, which has kept sterling depressed on the week.”
The Pound has risen 13% against the Dollar this year, and 11% versus the Euro, as the global financial system shows tentative signs of stabilising. The Pound weakened to a record low of 1.02 versus the Euro on December 30th and reached a 23-year low of $1.3505 against the Dollar on January 23rd. The UK currency fell earlier in the week after Bank of England chief economist Spencer Dale said a weaker currency is making UK assets more attractive to foreign investors.
The Bank of England said on Friday that financial institutions’ losses from the crisis have left them vulnerable to another wave of shocks, including the risk that the economy will remain mired in a recession. “Given their leverage and funding positions, banks in the UK and internationally will remain sensitive to further stocks for some time”, the central bank said in a statement.
UK house prices fell for a thirteenth consecutive month in May, as the average cost of a home in England and Wales fell 0.2% from April to £152,497. BoE policy maker Kate Barker said last week that the property market was still “some way away from normal” and the bank said that financial institutions are vulnerable to more shocks.
Despite the Banks warning that the banking sector will remain fragile and vunerable to external shocks, the Pound managed to avoid further selling pressure. The key factor is that overall risk appetite remained firm which underpinned the Pound and lessened the impact of bank warnings. Simarly, fears over the budget situation have also lost some of their impact for the timebeing.
EUR/USD
The Dollar fell against most of the major currencies on Friday, after China repeated its call for a supernational currency “delinked” from sovereign nations. The U.S currency headed towards its biggest weekly loss against the Euro in four weeks, after the People’s Bank of China said the International Monetary Fund should manage more of members’ foreign exchange reserves.
The Dollar was unable to gain any support during Friday and dopped significantly lower in European trading. There was also an implicit attack on the U.S economic policies, which fuelled speculation over underlying reserve diversification. The comments from China renewed market fears over the underlying threat of a central bank diversification away from the U.S currency and this is an importnant element in undermining dollar confidence during the day.
The Euro challenged levels above $1.4100 against the Dollar on Friday, before consolidationg around $1.4065 by the close of trading. The preliminary German consumer prices data was stronger than expected with a 0.4% rally and this will tend to dampen expectations of a more aggressive ECB stance on monetary policy.
Data Released 29th June
UK 09:30 Consumer Credit / Mortgage Applications (May)
EU 10:00 EC Business Climate (June)
EU 10:00 EC Economic Sentiment (June)
– Industrial / Services / Consumer
written by Adam Solomon
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