Analysis

14th June 2010

 

 

Sterling / Euro

 

Sterling tracked back from recent highs on Friday, losing over a cent against the euro following some weak UK productions figures.

• The pound dropped back after some unexpectedly weak figures for April, fueling concern the economic recovery will flounder as the government cuts spending to tame the budget deficit.
• There was also continued short covering in the euro following a decision from the German constitutional court to reject an injunction to prevent the country from contributing to the eurozone rescue package.
• In trading this morning, the pair remains little changed, with the price holding just above €1.20.
• Conflicting comments over the weekend from BoE members Dale and Sentance concerning rising inflation have offset each other, with the latter offering a more hawkish perspective.
• The UK's latest inflation reading is due tomorrow, and any move higher could gravely undermine the Bank's steadfast position that prices will fall over the medium term.
• Focus today is on the UK's newly formed Budget of Office Responsibility, which is due to publish its first report. It should outline its economic forecasts and the implications for the fiscal numbers based on existing policies.
• If, as widely expected, the OBR presents a weaker set of economic forecasts than its predecessors, sterling could remain trading in the low €1.20s.
  

 

Sterling / US Dollar

 

Sterling fell sharply against the dollar on Friday after data showing an unexpected fall in production sparked concerns about a fragile UK economic recovery.

• Data revealed that UK industrial output fell 0.4% in April, confounding expectations for a 0.4% rise, while manufacturing production was down by a similar amount.
• Sterling extended falls, tracking losses in other perceived riskier currencies, as weak US retail sales raised questions about the strength of the recovery in the world's largest economy.
• The poor figures offset a rally in equity markets with sterling eventually closing over a cent and a half down.
• In trading this morning though, the UK currency is again on the rise, pushing back over $1.46.
• Asian equities opened on a positive note this morning, maintaining improved optimism in the markets and putting broad downward pressure on the perceived safety of the greenback.
• The pound's rise could be undermined by the report from the Budget of Office Responsibility later today, and we do expect that the sterling's gains will be capped ahead of June 22nd.
  

 

Euro / US Dollar

The single currency failed to push higher against the dollar on Friday but improving risk sentiment has given the euro a further boost this morning.

• The greenback rose against most of its major counterparts at the end of last week as a drop in US retail sales increased concern about the sustainability of the global economic recovery, boosting demand for safety.
• However, short-covering in the euro has briefly taken the price back over 1.22 this morning, and the pair is currently holding just below that level.
• We expect though that the currency is being over-bought at this level, and it is unlikely that this recovery will bring the euro out of its downtrend.
• The structural problems undermining the currency have not altered and the market is set to remain wary of eurozone sovereign debt problems and the risks these pose to the banking sector.
• EU leaders are due to meet on Thursday in an attempt to convince markets they can contain debt problems, but there are growing doubts about how effective their policies can be.

 

 

Rest of the World

 

Australian Dollar

 

The pound continued its downward trend against the aussie on Friday, as a more positive tone on global equity markets boosted the appeal of risky assets.

• The Australian dollar continues to track equity prices and enjoyed a broad rally in higher-yielding currencies at the end of last week, recovering from technically oversold conditions to close nearly two cents higher.
• With Australia on a bank holiday weekend, trading has been thin this morning and sterling has pared its losses with the pair continuing to trade around the 1.71 level.
• There is little data from Australia this week and we expect direction to follow broader market conditions.
• However, the RBA's monetary policy minutes from their latest meeting are released tomorrow morning, and any further comments concerning the slowing pace of interest rate rises could put pressure on the aussie.

 

 

New Zealand Dollar

 

The pound resumed its sharp slide on Friday, losing another four cents to the kiwi but has stemmed its losses today following disappointing sales figures from New Zealand.

• Commodity-linked currencies were the main beneficiary of a rebound in investor confidence at the end of last week, with improving conditions buoying demand.
• The pair is trading in a relatively tight range this morning with an Australian bank holiday thinning conditions.
• However, the pound has been able to recover from its lows this morning, edging back over 2.11 following a faster-than-expected drop in New Zealand retail sales last month.
• A speech by the head the RBNZ has also dampened demand for the kiwi after he said the country needs to cut its high external debt levels.

 

 

 

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