Analysis

13th July 2010

Sterling / Euro

The pound climbed marginally higher against the euro yesterday, stemming its recent losses, but fell from its intra-day highs following comments from a leading rating agency.

• In the early session, sterling briefly dropped to a six-week low back below 1.19 after data showed the UK current account deficit widened to £9.6 billion in the first quarter.
• A final reading of the UK's first quarter economic growth produced few surprises, but did resurface concerns about the strength of the recovery as austerity measures kick in.
• The single currency failed to capitalise though ahead of Greece's return to capital markets today for the first time since April.
• The country is seeking to raise €1.25 billion from the market and relative demand for the bills should give some near term direction for the euro.
• Late in the session sterling took a knock after the rating agency Standard & Poor reaffirmed the UK's AAA rating, but maintained a negative outlook.
• Rating agencies are holding the headline again this morning with Portugal being downgraded, which has enabled sterling to move back toward 1.1950.
• Focus today will be on the UK's latest reading of inflation. The headline rate is expected to have dropped back again slightly again in June but remain above 3.0%, which should offer sterling some support.

Sterling / US Dollar

Having made a brief foray into positive territory, sterling was unable to sustain its gains against the dollar, dropping back close at the $1.50 level.

• The pound came under pressure in the early session after revisions to the UK's first-quarter economic data failed to show any improvement in growth and indicated that the recession had been worse than originally thought.
• Overall GDP was unrevised at 0.3%, but the data also showed that the peak-to-trough fall in output during the recession was revised up to 6.4% from 6.2%.
• The Office for National Statistics also revealed that Britain's current-account deficit in the first quarter was at its widest since the third quarter of 2007.
• Late on in the session, a negative economic outlook from Standard & Poor encouraged further sterling selling.
• The price is holding little changed this morning at $1.50 and we do not expect to see the pound too much higher in the near term as investors will not want to be caught short of the dollar with the US corporate earnings season opening.

Euro / US Dollar

The euro continued to fall from its highs against the dollar yesterday, dropping back below 1.26 amid a more cautious market climate.

• The dollar gained against most of its competitors as investors took a defensive stance ahead of the start of second-quarter US earnings, while casting a cautious eye toward the week's eurozone debt auctions.
• Nerves ahead of the publication of banking industry stress tests have left the euro struggling to maintain its recent the two-month high. Investors are concerned that the tests to demonstrate the resilience of the region's banking system will fail to reassure the market.
• The banks being tested account for 65% of Europe's banking industry with the results due to be published July 23 rd.
• In trading this morning the price has dropped back another half cent following Portugal's downgrade, with the euro now trading around 1.2550 and with numerous eurozone risks ahead we expect to see the single currency lower in coming days.

Rest of the World

Australian Dollar

It was a subdued session between this pair yesterday with the price closing practically unchanged as the market awaits a raft of figures from the US and China later this week.

• Some weak figures from the UK including negative comments from a credit rating agency were offset as the market took on a more cautious tone.
• The riskier aussie dollar was unable to sustain its recent gains with investors cautious against taking the currency higher amid a busy week of figures that should offer an updated view of the strength of the global economic recovery.
• Trepidation ahead of the July 23 rd release of the European bank stress tests results could also keep investors from bidding riskier currencies higher.
• In trading this morning sterling has managed to edge up, moving back above 1.72 with the aussie dollar tracking a slight drop in Asian equities.

New Zealand Dollar

As with other higher-risk currencies, the kiwi dollar is under a little pressure going into this week with a slew of data due that should prove a good gauge of risk appetite.

• Trading is comparatively subdued as investors are unwilling to buy or sell heavily before big name firms set the near-term tone in the markets by reporting their quarterly profits.
• Whilst trading volumes remain relatively light, sterling has been able to creep higher this morning but the market remains cautiously upbeat about the short-term outlook for the kiwi due to their interest rate policy.
• Near term, the major market moving figures for the kiwi will be China's latest reading of economic growth and headline annual inflation, due early Thursday morning. Any sign of a slowdown could put pressure on the higher-risk New Zealand dollar.

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