Analysis

12th July 2010

Sterling / Euro

The pound closed the week on the back foot against the euro with some stronger numbers from Germany providing the impetus for investors to cover short positions.

• Figures from the UK on Friday showed that a jump in imports caused a surprise widening in the UK trade gap, though other than an initial reaction the market was relatively unmoved.
• Sterling continued to edge lower through the day as some positive figures from Germany and an air of clarity over the stress tests on European banks supported a slight rise in confidence for the single currency.
• Despite its recent rally, the eurozone's debt problems are continuing to discourage investors from taking long positions in the euro and we expect that the pound may begin to recover some of its losses this week, particularly with Greece due to offer a bond issue tomorrow.
• Having briefly fallen to a six-week low this morning, sterling has recovered back over 1.19.
• Ahead today, the delayed final estimate of first quarter UK GDP is expected to be unrevised at 0.3%. This is unlikely to have any impact with markets already looking to the first estimate of second quarter growth due on the 23 rd.
• The major figure this week for sterling will be the latest headline inflation reading on Tuesday. Even though the rate is expected to have dropped back slightly, it looks set to remain stubbornly high, which could prove positive for the pound.

Sterling / US Dollar

Sterling fell back over a cent against the US dollar on Friday, retreating from early gains and tracking a slide in the euro.

• The pound mirrored the single currency's slide against the greenback on Friday, which dropped back having failed to break above resistance levels.
• Investors also retreated to the relative safety of the dollar as the market awaits a range of figures due from the US this week as well as the opening of the US earnings season.
• The strength of the US economy has come under question recently and data over the next few days should offer an updated view of conditions in the world's largest economy.
• With risk appetite waning, the pound is continuing to drop off this morning with the price now back below $1.50.
• The dollar is also being supported as investors sell their yen holdings after election results showed political uncertainty ahead for Japan.
• We expect trading today to be relatively subdued with the key announcements not due until later in the week.

Euro / US Dollar

The euro briefly touched a two-month high above $1.27 on Friday, supported by strong data from Germany, before heading lower as investors booked profits.

• A rally that pushed the euro to its highest level in more than two months stalled as the price failed to sustain a break above resistance leading investors to book profits before the weekend.
• The single currency struggled to maintain gains above $1.27 due to lingering worries about the eurozone economy. A Greek debt auction tomorrow and the keenly awaited results to the European bank stress tests should offer the market a clearer picture of conditions in the eurozone.
• In trading this morning, the euro is continuing to fall against a broadly stronger US dollar, with the price now back $1.26.
• The other focal point in the near term will be the start of the US earning season this week, and the expected positive results are likely to support riskier currencies.

Rest of the World

Australian Dollar

After a week of losses as global sentiment improved, the pound has steadied against the aussie this morning, holding firm despite positive housing numbers from Australia.

• Sterling fell heavily last week, dropping back nearly five percent from its four month high as a change in risk sentiment in the global markets supported the aussie dollar.
• In trading this morning the pound has pared its losses, with investors still nervous about the economic climate. On a macro view this week, upcoming stress test results of European banks, the US earnings season, and Chinese GDP data will provide a gauge of how the global economy is recovering and whether there is still a viable chance of a double-dip recession.
• On the domestic scene, Australian home loans in May were up 1.9%, higher than the expected 0.7%. This positive news follows strong jobs data last week and has led investors to raise bets for another interest rate rise perhaps as early as August.
• The pair remain little changed on the day with the price hovering just below 1.72.

New Zealand Dollar

This pair moved largely in tandem with sterling/aussie last week, with the UK currency dropping four percent as risk appetite improved.

• As fears over the eurozone eased, riskier assets were given a boost, which enabled the kiwi dollar to close the week over nine cents higher against the pound.
• Weak housing figures from New Zealand this morning have gone relatively unnoticed, but the pound has turned slightly higher with the markets cautious ahead of a number of key gauges of risk appetite this week.
• There are also a few key domestic figures due this week, most notably the latest inflation number, which could boost the kiwi if it shows another quarter-on-quarter rise.
• At present the pound is trading just below 2.12, almost unchanged on the day.

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