Analysis

10th June 2010

 

 

Sterling / Euro

 

The pound reversed the losses incurred following Fitch's comments, rallying straight back over 1.21 with the market concluding that the initial reaction was overdone.

• Sterling's drop back to 1.20 did not last long with the negative comments towards Britain's budget revealing nothing new and traders using the remarks as an excuse to cash short term profits.
• The market showed limited reaction to UK data yesterday. Britain's trade deficit came in wider than expected in April, while jobs growth slid in May and shop price inflation for May eased.
• With more macro themes dominating and the BoE due to speak today, the data had little impact and the pound was able to steadily appreciate, tracking gains in the FTSE.
• In trading this morning the price remains little changed above 1.21 with traders noting that the euro's rise against the dollar could be preventing sterling extending its gains.
• Investors today are awaiting a policy announcement from the Bank of England, where it is widely expected to keep interest rates unchanged at a record low 0.5%.
• Focus though will be on ECB President Trichet in the Q&A session at 13:30. He will face tough questions on the ECB's communication strategy and credibility following his decision to buy government bonds, which could put downward pressure on the euro.
  
  

 

Sterling / US Dollar

 

The pound climbed higher against the US dollar yesterday, tracking gains in European equities to close back above 1.45.

• Investors bought back the UK currency, taking the view it had been oversold the previous day when a ratings agency highlighted Britain's hefty budget deficit.
• Stock market gains and a rise in the euro against the greenback also boosted the pound as they suggested risk aversion in the market was easing slightly.
• Indeed, the modest improvement in financial market risk appetite saw the FTSE-100 index rise for the first time in four sessions, though it is struggling to maintain those gains again closing in on the 5000 level this morning.
• The pound is continuing to move higher in this early session with sentiment slightly improved, following an interest rate rise in New Zealand, strong Australian employment figures, and some positive comments from China.
• Currently the pound is trading up half a cent with the price now nearing 1.46 as investors expect little drama from the Bank of England's rate decision today.
  
  

 

Euro / US Dollar

The euro rose against the dollar for a second straight session yesterday, boosted by renewed market hopes that Europe's debt crisis may not put the brakes on global growth.

• There was speculation that Chinese exports grew 50% in May from a year earlier, easing fears that Europe's debt crisis would slow global growth.
• Also supporting a slight rise in risk sentiment, in a speech Ben Bernanke struck a positive note saying that the US recover is still on a solid footing, which provided traders with an opportunity to take profits on the euro's recent slide.
• In trading this morning the euro has extended its gains, helped by comments from a Chinese pension fund chief who said the single currency could weather the sovereign debt crisis.
• At present the price is holding above 1.20, but the single currency could come under renewed pressure this afternoon following comments from the European Central Bank president Trichet.
• European governments are still pouring money into the ECB where overnight deposits hit a record yesterday, highlighting the fact that there are still widespread worries about the health of the financial system.

 

 

Rest of the World

 

Australian Dollar

 

After a brief move higher yesterday, the pound has slipped again today following strong employment figures from Australia.

• Data this morning revealed that the Australian economy added 26,900 jobs in May, far more than the expected 17,500.
• May's employment report also showed that the overall unemployment rate dropped to 5.2% having been stuck around 5.4% for the past few months.
• The figures have given the aussie a broad boost this morning with expectations now building that the RBA may seek to raise interest rates again this year as wage pressures build.
• Data from China confirming faster exports in May has also given higher-yielding currencies today and the pound is now trading over a cent lower with the price back at 1.74.

 

 

New Zealand Dollar

 

Having gained around a cent against the kiwi yesterday, the pound has slid sharply this morning following the RBNZ's decision to raise the interest rate.

• As many expected the Reserve Bank of New Zealand decided to hike the interest rate by 25 basis points to 2.75%. The Bank cited strong trading partner activity - particularly in Asia, Australia, and the US - and rising commodity prices as the key driver of the economic recovery.
• Bank Governor Alan Bullard's initial statement was quite upbeat but he did comment on the growing financial turmoil in Europe, which he said could lead to a more subdued rate of policy tightening.
• Despite this caution, the market is now pricing in a steady rise to 4.00% over the coming months unless the global economic backdrop significantly deteriorates.
• In the wake of the decision, the New Zealand dollar has strengthened across the board with sterling down around 1.3% and the price currently trading back below 2.15.

 

 

 

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