Analysis

17th June 2010

Sterling / Euro

After a quiet day in which the pair remained largely in range, the pound lost ground to the euro late on in the session to close back below 1.20.

• Compared to recent volatility, the price remained little changed during the European session with the pound finding some slight upside support following positive employment figures.
• Official data showed the number of people claiming jobless benefit fell by 30,900 in May, beating analyst's expectation for a fall of just 20,000.
• The euro was also under slight pressure following a report that banks in Spain are facing liquidity freeze with other banks reluctant to lend to them.
• However, sterling lost late in the New York session following comments from Mervyn King who said that the economy exhibits none of the traits associated with prolonged inflation.
• Announcements from Osborne about introducing a regularity framework and a bank levy also weighed on sterling bringing the price firmly back below 1.20.
• These factors are continuing to weigh this morning, with the pound currently trading back around 1.1950, with concerns over BP's mounting costs also now knocking the pound.
• Retail sales data is expected in the UK today at 09:30, but again we do not expect to see much reaction in the markets with the Budget securely in focus.
  

Sterling / US Dollar

The pound fell back from its recent highs against the dollar yesterday losing ground late in the day following comments from Chancellor Osborne.

• In early trading sterling eased from its one-month highs as investors pulled back from riskier assets, although the decline was limited by data showing some improvement in the UK labour market.
• Sterling came under pressure in the evening though as the market reacted to comments from both George Osborne and Mervyn King.
• The BoE Governor downplayed inflationary pressures, whilst Osborne outlined the possibility of curbing activity in the UK banking industry, turning sentiment against the pound.
• The market has continued to sell sterling this morning, with the price now back below $1.47.
• Core inflation data from the US this afternoon is expected to show little change on the month, with the annual rate remaining within acceptable levels.
• We see little upside potential for the pound through the day and expect that with the price failing to rally beyond resistance at 1.48, the price could hover at this level ahead of the 22nd.
  

Euro / US Dollar

The euro fell back against the US dollar yesterday, retreating from an earlier two-week high, as fresh concerns about Spain's credit and banking system undermined sentiment.

• The yield gap between Spanish and German bunds rose to its highest level in ten years following a report that the EU, the IMF and the US Treasury were drawing up a liquidity plan for Spain.
• Although all parties denied such a report, it renewed worries about Spain's public finances and banking system, ending the euros recent rally.
• Traders said the euro was likely to see its rallies being sold into with tolerance for risk subsiding on a revival of concerns about the eurozone's fiscal troubles.
• The single currency is heading lower again this morning, although the pace of decline is notably slower than we have seen previously with the price only just below 1.23.
• Today the European Union holds a summit to discuss ways to strengthen budget discipline and economic policy coordination. It remains to be seen whether they can lift confidence in the eurozone with their efforts thus far failing to do so.

Rest of the World

Australian Dollar

It was another quiet day between this pair with little market moving announcements around and sterling eventually closing just half a cent down.

• Despite weaker sentiment toward sterling, profit taking in higher-yielding assets was in favour yesterday after the currencies failed to break through resistance levels.
• Again this morning, there is little change between the pair with demand for the aussie relatively low as Chinese markets re-opened after a three-day break and were unable to echo Wall Street's improved performance this week.
• Investors are also cautious ahead of a raft of European bond auctions today, notably from Spain, which should give the market an idea of the current levels of demand for euro assets.
• Should we see a positive reaction to the Budget, sterling should begin to move higher once again with the aussie set to remain under pressure amid the current risk adverse climate.

New Zealand Dollar

The pound maintained its steady downward trend against the kiwi yesterday, but lost just 0.3% with trading remaining in a tight range.

• A lack of data from New Zealand and a quieter picture on the global front is keeping trading margins slim at present in contrast to the large daily swings we saw not too long ago.
• There was a consumer confidence survey out which showed consumers less optimistic about their own economy's current and future outlook. This is consistent with other indicators showing caution and patchy activity.
• Whilst the market remains upbeat about NZ's interest rate prospects though, demand for the kiwi is steady and the price is back below 2.11 this morning.

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