GBPEUR/GBPUSD
The Pound rallied strongly against the U.S Dollar yesterday, reaching a high of $1.6600 in London, while the UK currency also rose for a fourth straight day versus the Euro, briefly touching upon 1.1200. A report from the Bank of England showed that UK mortgage approvals increased more than initial estimates in September.
Banks and lenders granted 56,125 home loans, compared with 52,970 in August, as approvals climbed to the highest level in 18 months and added to signs that the housing market is stabilising. Bank of England policy makers will decide next week whether to expand the £175 billion asset-purchase program of buying government debt to bolster the economy.
The third quarter GDP figures showed that the UK economy remains entrenched in the worst recession on record, after contracting for six consecutive quarters and economists have warned that the housing revival may come under scrutiny if job losses mount. James Knightly, an economist at ING Financial Markets, said “it will be a very tight decision for the Bank of England. The fact that gross domestic product is still negative will make it pretty difficult for them to do anything other than expand quantitative easing.”
The Pound has rallied furiously against the majors in spite of the GDP numbers last week, amid speculation that the third quarter growth figures will be revised higher. The Pound extended gains made against the Dollar yesterday and traded above $1.65, after the opening of the U.S trading session. Recent reports have indicated that housing is recovering, after falling as much as a fifth from their peak in 2007.
Former Bank of England policy maker David Blanchflower said on October 26th that house prices may fall next year, leaving as many as 3 million people with homes worth less than the mortgages used to buy them. Monthly mortgage approvals are still only half what they were in September 2007, prior to when the credit crisis began.
Consumer spending may also be slow to recover as Britons choose to reduce their 1.46 trillion of debts built up during a decade long economic boom. Spending, which accounts for roughly two thirds of the economy, declined in September, while consumer credit also fell for a third straight month. The data released yesterday suggests that the Bank of England’s efforts to unlock credit markets may be beginning to work.
Economists are divided over whether the Monetary Policy Committee should expand its bond-purchasing program on November 5th, after the economy contracted 0.4% between July and September. The gain in Sterling yesterday propelled the UK currency to its first monthly advance versus the Dollar since July.
The Pound also rallied against the Dollar, as data released in the U.S yesterday showed that the economy returned to growth in the third quarter. U.S gross domestic product expanded 3.5% from July to September, the first expansion in more than a year, and surpassed the 3.2% forecast. Henrik Gullberg, a strategist at Deutsche Bank AG, said that “if we get strong data, be that in the UK or globally, it’s a good thing for Sterling.”
The UK currency was also poised to break three consecutive months of declines versus the Euro, even after last week’s GDP report from the Office of National Statistics. The Pound advanced 0.5% against the Euro yesterday and may encounter strong resistance between 1.1200-1.1270. Gullberg also said yesterday that “the market overreacted to the weak GDP numbers in the UK, What we have seen since is the market has moderated its bearish opinion.”
The Pound lost some ground against the higher-yielding currencies, as the stronger-than-expected U.S data helped encourage investors back to riskier assets. UK stocks advanced 0.4% in London, after the report reignited expectations that a seven month rally is justified by the earnings outlook. The focus will soon switch to the BoE rate announcement and it will interesting to see whether the Pound can hold on to the recent gains made against both the Euro and the Dollar.
EUR/USD
The Dollar and the Japanese Yen declined against most of the 16 most actively traded currencies yesterday, after the U.S economy returned to growth in the third quarter and encouraged investors away from the so-called “safe haven” assets. The U.S currency dropped against the Euro for the first time in five days, as stocks and commodities rallied worldwide.
Michael Woolfolk, a senior currency strategist at New York Mellon Corp, said “risk is back on. It should be positive for the stock market and negative for the Dollar.” The Dollar declined 0.6% against the Euro in New York, despite comments from European Central Bank member Axel Weber, that the Bank may start to withdraw its emergency stimulus measures next year.
U.S policy makers will now focus on whether the recovery, supported by Federal assistance to the housing and auto industries, can be sustained into 2010 and revive the labour market. The record $1.4 trillion budget deficit limits President Obama’s options more more emergency stimulus, while Fed officials try to convince investors that the Central Bank will exit emergency programs.
Data Released 30th October
U.K 00.01 Gfk Consumer Confidence Survey
EU 10:00 Flash HICP (October)
EU 10:00 Unemployment (September)
U.S 12:30 Employment Cost Index (Q3)
U.S 12:30 Personal Income / Consumption (September)
– Core PCE
U.S 13:45 Chicago PMI (October)
U.S 13:55 Michigan Sentiment (October Final)
written by Adam Solomon
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