Analysis

16th June 2010

Sterling / Euro

Sterling lost ground to the single currency yesterday following UK data that showed a sharper-than-expected fall in the headline rate of inflation.

• Official data showed the annual rate of consumer price inflation fell to 3.4% in May from 3.7% in April, easing the possibility that the Bank will have to prematurely raise interest rates.
• Whilst the lower CPI reading should allay some of the most immediate concerns about price pressures, it is unlikely to have eliminated the market's deep-seated concerns about inflationary risks over the longer term.
• Sterling briefly capped its losses after a report showed an index relating to Germany's investor confidence dropped significantly in June, reflecting the extent of the debt crisis in the eurozone.
• The data went relatively unnoticed though, and sterling briefly dropped back below 1.20. However it has since recovered slightly this morning with the price currently sitting back in its recent range.
• Data from the UK this morning focuses on UK unemployment with the latest claimant count released. Though we're expecting to see another improvement on the month, which should hit the headlines, the market reaction is likely to be relatively muted.
  

Sterling / US Dollar

The pound advanced against the dollar once again yesterday, tracking rising equity prices to trade at a fresh one-month high.

• The US dollar was under broad pressure as Asian, European, and US stock markets continued their upward charge, weakening demand for safe haven currencies.
• The pound did come under some pressure as data revealed a lower level of inflation in May, but the broader macro, risk-based themes continue to have the stronger influence on this pair.
• The momentum at present seems to be with sterling rather than the dollar, with the former currently able to shrug off negative data. Whilst we see the equity markets moving north, sterling is likely to continue appreciating with a possible move to 1.50 in the short term.
• However, the pound has come off its highs this morning, currently trading back below 1.48, with the market slightly apprehensive ahead of the emergency budget.
  

Euro / US Dollar

The euro rose for a second day against the dollar as gains in global stock markets spurred demand for riskier assets and prompted traders to end bets that the currency would decline.

• The more positive risk environment was also spurred as European debt auctions received solid demand, soothing worries about the debt crisis and prompting investors to cover short positions.
• Gains were briefly capped after a German investor sentiment index fell much further than expected in June, stirring some concern about the eurozone's economic outlook.
• However, for the most part investors set aside concerns about the eurozone financial sector, looking on the bright side as Spain raised €5.2 billion at their debt auction and Belgium also managing €2.5 billion.
• The euro is off its highs this morning though with the market unwilling to see the price rise too high too fast amid the current climate.
• There is a raft of data from the US this afternoon and though none of them are particularly market moving, a positive set of figures should keep equities performing well, dampening demand for US dollar.

Rest of the World

Australian Dollar

It was a relatively quiet day between this pair yesterday with sterling edging lower against the aussie as stronger equities buoyed higher-risk demand.

• With Australian traders coming off the holiday weekend, their initial play was to sell the aussie dollar, banking profits earned at the end of last week, which gave sterling a boost during the European session.
• However, a strong showing on the US markets, with the Dow closing over 2.0% higher, boosted demand for risky assets, enabling the aussie to recover its losses.
• In trading this morning the pair remains relatively unchanged with the price holding around 1.71 and the aussie unable to capitalise on gains of 1% in Asian stocks.
• On the downside the aussie is finding support after a Russian central banker said that they may be looking to add aussie dollars to their currency reserves given the recent fluctuations in the euro.
• However, with the market not expecting the RBA to raise rates again next month, the aussie's upside potential is limited and we expect sterling could move higher post Budget.

New Zealand Dollar

This pair traded in a tight range yesterday, with neither currency able to find much support and sterling eventually closing just fractionally lower.

• The kiwi's movement mirrored that of the aussie once again yesterday, with sterling slipping back from early gains as positive US equities boosted risk appetite.
• In trading this morning the pound has gained over a cent as investors sell out of the risk rally, still cautious about the debt concerns lingering over Europe.
• In addition some weaker data from New Zealand including lower retail sales and housing figures is still pointing to a sluggish recovery, slowing kiwi demand.
• With no economic news out from New Zealand for the rest of the week, we expect the kiwi to continue tracking equity prices.

Caxton FX is Authorised and Regulated by The Financial Services Authority to provide investment advice.

This email is prepared by Caxton FX Ltd for information only. It may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security. The information contained herein is believed to be reliable but Caxton FX Ltd does not represent that it is accurate or complete. No liability is accepted whatsoever for any loss from its use. Quotations and assumptions are indicative only. Caxton FX Ltd or its affiliates may have a material interest in the subject or a related matter herein. Caxton FX Ltd is authorised and regulated by the Financial Services Authority for investment advice only. Foreign exchange transactions with Caxton FX fall outside the remit of the FSA and are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade. Caxton FX Ltd accepts no responsibility for any loss suffered or damages sustained through any act or omission taken as taken as a result of any of the information herein.