Analysis

15th June 2010

Sterling / Euro

The pound rebounded from early lows yesterday, closing half a cent higher against the euro following the OBR's revised economic forecasts.

• The newly created Office for Budget Responsibility in their first report offered up revised estimates for the economy, focusing on GDP and borrowing costs.
• Notably, the fiscal watchdog downgraded its forecasts for economic growth in 2011 to 2.6%, from Darling's previous estimate of 3.25%. However, this was better than many had feared and did not impact sterling's direction.
• The OBR also forecast lower UK borrowing costs, certainly a positive considering the current climate, which did gave the pound a slight boost.
• In trading this morning, the pound is continuing to edge marginally higher with the pound just holding below €1.21.
• The euro has come under slight pressure following Moody's decision to cut Greece's credit rating to junk status, following Standard & Poor's lead.
• The impact of the downgrade has been fairly minimal though with investors none too surprised by the move.
• In focus today will be the latest UK inflation figure, due at 09:30, which is forecast to start dipping back from its peaks of 3.7% hit last month.
  

Sterling / US Dollar

The pound rose nearly two cents against the dollar yesterday, hitting a one-month high amid a more positive market sentiment.

• Sterling got an initial boost after the OBR, created by the new Conservative-Liberal Democrat coalition, forecast that state borrowing would fall at a slightly faster pace than originally thought, partly due to higher tax receipts.
• Further support came from comments overnight and in the media at the weekend by Bank of England policymakers warning of rising inflation and highlighting the possibility of UK interest rates rising later this year.
• Although certain policymakers have said they expect inflation to ease in the coming months, it has so far proved stickier than they previously envisaged.
• The rise in global equities that has boosted risk appetite in recent days has come to a halt this morning, with European stocks opening on the back foot.
• Sterling is tracking these markets, and is currently slightly lower on the day, though is holding around $1.4750 for now.
  

Euro / US Dollar

The single currency maintained its upward movement yesterday, gaining a further cent against the dollar to extend its ten-day high.

• The euro strengthened in early trading to its highest level in more than a week after a report showed industrial production in the 16-nation region expanded at a faster pace than forecast.
• The dollar also came under selling pressure as world stocks headed for a fourth successive day of gains, prompting investors to trim short positions in higher risk currencies.
• Traders noted the market was going through a slight corrective phase with global market sentiment improving.
• Having failed to break resistance at $1.23, the euro's rally is showing signs of fading this morning, with investors taking profits and sentiment towards the single currency still fragile, particularly after Moody's downgrade of Greece.
• The news has given investors an excuse to book profits but comes as no real surprise. To that end, in the absence of any fresh negative signs from Europe, the euro's downtrend could ease.
• At present the pair is trading just below $1.22.

Rest of the World

Australian Dollar

Sterling capped its downtrend spiral yesterday, climbing back from three-week lows against the aussie and the price is pushing higher again this morning.

• The Australian currency initially rose as higher stocks and crude oil prices spurred demand for higher-yielding assets. This positive sentiment towards the higher-risk currency was offset though by improved demand for the pound, with sterling eventually closing 0.3% higher.
• In trading this morning, sterling is again on the rise after minutes to the RBA's June meeting confirmed the market view that the RBA will be slowing their pace of interest rate rises.
• The minutes were read as slightly hawkish but they ruled out a rate rise in July, dulling demand for the aussie.
• Comments from RBA Deputy Governor Ric Battellino that Europe's debt troubles were "really quite worrying" as they may not be solved anytime soon also gave investors one more reason to take profits in the aussie, with the price now nearing 1.73.

New Zealand Dollar

Moving in a relatively similar range to sterling/aussie, the pound also gained against the kiwi yesterday, ending two days of sharp declines.

• The New Zealand dollar came under pressure after central bank Governor Alan Bollard said the strong currency has hindered efforts to reduce the country's large investment-income deficit.
• Although the market is still expecting further rate rises from the RBNZ this year, investors will remain cautious of the fact the officials do not want to see their currency over-appreciate.
• Market sentiment will also remain fragile and episodes of risk aversion should be expected, which will support sterling's gains.
• At present the UK currency is trading up a further cent, with the price currently hovering just above 2.13.

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