Analysis

14th July 2010

 

 

Sterling / Euro

 

Having briefly pushed up over €1.20, sterling steadily had its gains eroded following solid demand for Greek debt, which brought the price back toward €1.19.

• Sterling opened on a bright note as the headline rate of inflation in the UK dropped back to 3.2% in June, but held marginally above an expected drop to 3.1%.
• Although the rate is dropping, it is still stubbornly high and has now held above 3.0% for six months in a row. This has raised expectations that MPC member Andrew Sentance will again have voted for an interest rate rise this month.
• Peaking just above €1.20 the pound then began to steadily turn lower following a successful Greek bond issue and despite Portugal suffering a credit downgrade.
• In trading this morning, sterling is back on the rise again heading for the crucial €1.20 level.
• The smooth running of Greece's debt auction appears to have settled the markets for the time being but while the eurozone's fiscal issues remain it is hard to see the euro garnering too much support.
• The UK sees the publication of monthly labour market statistics for June. These are expected to continue to paint a fairly mixed picture with claimant count unemployment likely to fall by another 20k.

 

 

Sterling / US Dollar

 

Sterling extended gains on Tuesday, climbing near 1.0% against the dollar on speculation high levels of inflation in the UK may add to the argument for higher interest rates.

• Sterling enjoyed a positive start as data showed inflation dropping at a slower rate than many had expected, prompting higher demand for the currency.
• The US dollar also came under broad selling pressure, declining against most of its major counterparts as speculation grew that US corporate earnings will exceed estimates following Intel's solid results and prompting investors to buy higher-yielding assets.
• The dollar remained lower after the Commerce Department reported that the US trade deficit unexpectedly widened to $42.3 billion in May, from $40.3 billion in the previous month.
• In trading this morning, sterling is continuing to gain and is now trading at a two and a half month high with the price above $1.52.
• US retail sales figures are the major figure today, but the minutes from the Fed's latest meeting due this evening could also impact the market.

 

 

Euro / US Dollar

 

In the early session yesterday the euro dropped back, undermined by Portugal's downgrade, but it rallied steadily to close back above $1.27.

• The euro headed lower as Moody's Investors Service reduced Portugal's credit rating, but the impact proved short-lived with the downgrade widely expected.
• The euro proceeded to turn higher as Greece successfully sold six-month treasury bills at a rate below the 5% charged by the European Union when it rescued the nation from default.
• Improving sentiment about the US corporate earnings season, which was reflected in the equity markets yesterday (Dow up 1.5%), also boosted the euro as the appeal of safer assets wore thin.
• Once again the 1.27 level is proving a stiff resistance level for the euro and it is struggling to push higher this morning.
• The minutes from the Fed's latest policy meeting due this evening are likely to show that growth forecasts have been revised downward, which could ease risk appetite further.

 

 

Rest of the World

 

Australian Dollar

 

A credit rating downgrade for Portugal coupled with a raft of figures awaited from the US kept the higher-risk aussie under pressure yesterday.

• Citing poor economic growth potential, Moody's downgraded Portugal, which set off some safe haven trading keeping the aussie dollar on the back foot.
• Although Intel posted strong second quarter earnings, investors remain cautious with a lot of data this week still to be released and many are sitting on the sidelines, which is leading to very low trading volumes.
• The pound is again creeping higher this morning with a positive consumer sentiment survey from Australia going relatively unnoticed.
• We expect little change in the trend today with investors unwilling to place positions in the aussie ahead of Chinese economic growth figures due tomorrow morning.

 

 

New Zealand Dollar

 

A positive day on the global equity markets supported the kiwi yesterday, but disappointing data from New Zealand has lead to a slight selloff this morning.

• The kiwi managed hesitant gains as equity prices rallied in Europe, through the US and Asia, buoying demand for the higher-yielding kiwi dollar.
• The kiwi has been knocked this morning following disappointing data from the housing sector, which showed that sales figures dipped sharply in June. May retail sales also rose by less-than-expected, further evidence of a patchy recovery.
• Sterling is up nearly a cent this morning in the wake of the figures, however, the market is still backing the view that the Reserve Bank of New Zealand will keep raising interest rates steadily, which may prevent the kiwi from dropping too far.

 

 

 

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