GBPEUR/GBPUSD
The Pound rallied for a second day against the Dollar yesterday, rising to a high of $1.6436 in London, while the UK currency also consolidated on recent gains made against the Euro. The Confederation of British Industry reported that UK retail sales climbed to the highest level in almost two years in October, with retailers the most optimistic since December 2007.
Retailers saying that sales increased from a year earlier outnumbered those reporting declines by 8 percentage points, up from 3 points in September. The buoyant tone of the report follows data released yesterday that showed business confidence rose to the highest level in 18-months and the Bank of England must decide whether it is necessary to inject additional stimulus measures.
Steven Barrow, head of Group of 10 research at Standard Bank Plc, said yesterday that “if the market is broadly positioned for an extension of quantitative easing, the risk of a big move is more of a rally in sterling if it doesn’t happen” The Pound’s back-to-back gain against the Euro was the first in more than a week and the resilience in Sterling following the GDP data last week is causing many economists to believe that the figures will be revised higher over the coming months.
Bank of England policy maker Adam Posen was speaking this week and said that there are tentative signs of an economic recovery in Britain, despite reports of an unexpected third-quarter contraction. Jeremy Stretch, a senior currency strategist at Rabobank International said that the CBI data and Posen comments “add another element of doubt in the validity of the third quarter numbers last week. Maybe it’s a case that they will wait and see on quantitative easing.”
The Pound advanced against 11 out of the 16 most actively traded currencies, rising up to 0.6% against both the Dollar and the Euro, prior to a report in the U.S showed that consumer confidence unexpectedly fell this month. The UK currency also gaining momentum on speculation that the Bank of England will be amongst the first central banks to begin raising interest rates.
Easing credit market conditions and a revival in global demand suggests that the UK is emerging from the recession quicker than the GDP numbers indicate. However, according to Posen, officials should maintain the current stimulus programs in order to cement the recovery and the MPC will probably extend quantitative easing next month.
Posen said on Monday that the 0.4% drop in gross domestic product in the third quarter doesn’t imply anything for the forecasts, that policy makers produce for the November 5th decision. There’s evidence of a sustained economic recovery, even if Britain is lagging behind other countries, such as Germany and France, in pulling out of the recession.
The Pound suffered its biggest drop since March on Friday 23rd October, after the GDP numbers increased speculation that policy makers would extend the bond purchasing program beyond the current £175 billion. According to the Taylor Rule, the UK currency’s declines over the past quarter has left it 22% undervalued on a purchasing power parity basis.
Stephen Gallo, head of market analysis at Schneider Foreign Exchange, said that a weaker currency may help Britain emerge from the recession. “A country like the UK that needs to rebalance towards net exports can do with a modest but stable devaluation of Sterling.” Analysts at Commerzbank AG speculate that the Pound will weaken to 1.0600 versus the Euro over the coming weeks.
EUR/USD
The lower-yielding currencies rallied against most of their major counterparts yesterday, as the Dollar advanced versus the Euro for a third straight day in the longest stretch of gains since August. U.S consumer confidence fell this month, reducing the demand for higher-yielding assets, as traders sought the relative security of Dollar denominated assets.
The Dollar appreciated 0.5% to $1.4804 in New York , amid concerns that global growth will fail to justify the valuations assigned to stocks and commodities. The rally in such securities is probably at its peak and recent data indicates that U.S economic growth is still lagging behind historical averages.
Vassili Serebriakov, a strategist at Wells Fargo & Co, said that “consumer confidence is weak. There’s to an extent a disconnect between what financial markets are telling us and what the economic data is telling us.” The Conference Board’s consumer confidence index dropped to a reading of 47.7 in October, from a revised 53.4 in the previous month.
Data Released 28th October
U.K 11:00 Land Registry House Prices (September)
EU 09:00 ECB Bank Lending Survey Published
U.S 12:30 Durable Goods Orders (September)
U.S 14:00 New Home Sales (September)
written by Adam Solomon
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