GBP/USD GBP/EUR
The Pound rallied to the highest level this year against the U.S Dollar, rising to a high of $1.5500 in New York, while the UK currency also strengthened for a third straight day against the Euro, after ICAP Plc posted increased revenue. Marks & Spencer Group Plc’s net income beat analyst’s initial estimates, increasing optimism that the worst of the recession may be over.
UK stocks rose to the highest level in four years, amid speculation that the government has begun talks with investors over the possibility of selling stakes in part-nationalised banks, while mining companies climbed with metal prices. Royal Bank of Scotland Group Plc, majority owned by the government, rallied 4.4% in London, as the FTSE 100 Index gained another 0.8%, rising to the highest level since January 8th.
The FTSE 100 has rebounded 28% from its lowest point of the year on March 3rd on increased optimism that the worst of the recession may be over. European stocks also rallied yesterday, after reports in Germany showed that investor confidence rose to a three-year high in May. The Financial Times reported yesterday that the UK government has begun talks with sovereign wealth funds and other investors about selling stakes in part nationalised banks.
The move is designed to improve confidence in financial stocks and the FTSE 350 Banks Index was up 3.3% on the day, while gilts fell after the Treasury sold £1.25 billion of the bonds. It will auction a record £5 billion of five-year notes in two days, as part of its quantitative easing program. Jeremy Stretch, a senior currency strategist at Rabobank International said that “news from the corporate front is pretty encouraging and that’s supporting the Pound.”
The Pound advanced as much as 1.1% to a high of $1.5514, the strongest level since December 18th last year, while the UK currency also rallied 0.5% to a high of 1.14000 versus the Euro, the highest level since May 7th. ICAP, the world’s biggest broker of transactions between banks, said that profit rose 4% to £175 million in the year to March 31st, while Marks & Spencer reported net income of £508 million.
In terms of economic data, the Pound also stood firm following reports that UK inflation slowed more than expected in April, to the weakest level in 15-months, as the recession undermined price pressure within the economy. According to the report from the Office of National Statistics, consumer prices rose 2.3% from a year earlier, marginally lower than the 2.4% anticipated.
A separate gauge of the report showed that the retail price index measure of inflation dropped an annual 1.2%, the most since records began in 1948. The results of the data will stoke concerns that the economy is slipping further into deflation and tempt the Bank of England to raise interest rates sooner than predicted.
The governor of the BoE Mervyn King said last week that inflation will slow “sharply”, reaching around 0.5% by September. Philip Shaw, chief economist at Investec Securities in London, said “if the recovery doesn’t ignite properly, that risks a very low inflationary environment, possibly deflation.” The drop in the inflation rate was led by the slump in housing costs, as energy prices fell.
The drop in the retail price index, used as a measure of the cost of living, was spurred by lower mortgage interest payments, after the Bank of England cut its benchmark interest rate to a record low of 0.5% and embarked on a period of quantitative easing. Excluding the cost of home loans, retail price inflation was 1.7%, the weakest pace since June 2002.
Policy makers within the monetary policy committee kept the benchmark lending rate unchanged in May and increased the asset insurance program to £125 billion, through the purchase of government and corporate bonds with newly created money. The UK economy is still submerged in the worst recession since the Second World War, after gross domestic product contracted 1.9% in the first quarter.
The Euro declined heavily against the Pound yesterday but the single currency may gain some support this morning, amid fundamental and technical factors. The minutes from the Bank of England’s last policy meeting may undermine support for the Pound, if the monetary policy committee reiterate the increase in quantitative easing measures.
In addition, a report from Societe Generale SA shows that the Euro must trade above the resistance level at 1.1410 against the Pound, created by the May 7th low, if it’s to decline as far the February low of 1.1574, a level that represents a 50% retracement of the downside move. Euro buyers would be well placed to take advantage of the current rate, or at least place a stop order around 1.1270 to protect against a rejection of the upper levels.
EUR/USD
The Euro rallied towards $1.3700 against the Dollar yesterday, after German investor confidence rose more than anticipated, to a three-year high in May. Stock markets subsequently rose and data signaled that the worst of the recession may be over. The report from the ZEW Centre for Economic and Social Research stated that its index of investor and analyst expectation increased to a reading of 31.1, from just 13 in April.
European stocks have gained impressively for the past two months, amid expectations that the government and ECB efforts to revive growth will drag the economy out of the current slump. The German economy has contracted at a record pace in the first quarter of the year but manufacturing orders and exports unexpectedly rose in May and business confidence bounced from a 26-year low.
The German Chancellor Angela Merkel will spend in the region of €82 billion to stem the worst recession in over sixty years. The European Central Bank has trimmed its key interest rate to a record low of 1% and announced that it will purchase €60 billion of covered bonds to help free up credit conditions.
The Dollar declined against all of the 16-most actively traded currencies yesterday, after three U.S financial firms’ efforts to return government bailout money increased speculation that banks have sufficient funds, reducing the demand for the security of U.S denominated assets. The U.S currency fell 0.5% to a low of $1.3636 against the Euro.
In terms of economic data, U.S housing starts unexpectedly fell 13% to an annual rate of 458,000, as builders began working on the fewest number of homes on record in April. The slump in home building has brought the supply of new properties below the rate households are being created, while surging unemployment will temper the likely rebound.
Data Released 20th May
GER 07:00 Producer Price Index (April)
U.K 09:30 BoE Monetary Policy Committee Meeting – Minutes of 6/7 Meeting
U.K 11:00 CBI Industrial Orders (March)
U.S 19:00 FOMC Meeting Minutes (April)
written by Adam Solomon
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