Analysis

18th June 2010

 

 

Sterling / Euro

 

The pound finished exactly where it started on Thursday with positive sales figures in the UK offset by strong demand for a Spanish bond issue.

• The pound gained some traction after British retail sales rose six times faster than expected on the month in May at 0.6% with consumers flocking to electrical goods stores ahead of the World Cup.
• Overall, sales in the second quarter remain on course to show a strong rise, which in turn should help economic growth, boosting speculation that Britain's economic recovery is gathering pace.
• In the EU though, a positive response to the Spanish bond issue eased debt fears on the continent, offsetting any upside potential for sterling with the price eventually closing unchanged just below 1.20.
• In trading this morning the pound has crept higher, but remains short of 1.20.
• In data today, we expect public sector net borrowing to be £18bn in May, though ahead of the emergency Budget, this latest update of the UK public finances will merely underline the scale of the challenge facing the Chancellor and is unlikely to have any dramatic market moving effect.

 

 

Sterling / US Dollar

 

Sterling rose to near a one-month high versus the dollar yesterday as short positions were squeezed following higher-than-expected UK retail sales.

• The strong sales figures, although underlined by the World Cup effect, still represented improving market conditions, buoying the pound.
• Sterling was also helped as risk sentiment picked up following a well covered Spanish bond auction and strong European equities, which advanced for a seventh straight session.
• In the US session, the dollar came under pressure as a rise in jobless claims and weaker-than-expected manufacturing data prompted investors to scale back expectations of a rate hike from the Fed.
• In trading this morning, sterling has reached a fresh one-month high on improved risk tolerance.
• The price has moved through key resistance at 1.48, and is now moving towards 1.49, half a cent up on the day.
• With risk appetite slightly stronger at present, demand for the dollar has weakened off, however we expect that the immediate reaction to the Budget will see the pound's recent rally reined in.
  

 

Euro / US Dollar

The euro climbed to a three-week high against the dollar yesterday after a Spanish bond sale soothed worries about the countries public finances.

• Solid demand for Spanish bonds eased fears about the country's ability to finance itself, supporting a move higher for the euro. In addition the spread between Spanish and benchmark German bond yields narrowed slightly with an element of confidence returning.
• However, underlying credit concerns could still rein in risk-taking. The bond issue went well but with high yields on offer it was not too surprising. There are still worrying signs for Spain, particularly stresses in the Spanish bank funding market.
• The euro has opened relatively unchanged this morning, as yet unable to move above the $1.24 level. However, in the past two weeks the euro has advanced by more than 3.5% against the dollar, underscoring a slight shift in sentiment.
• In addition, just for information, despite all the talk of eurozone members coming out of the eurozone, new countries are joining. The mood was upbeat yesterday when the EU said that Estonia would be shifting from the kroon to the euro on Jan 1 st 2011.

 

Rest of the World

 

Australian Dollar

 

Light trading was again the theme yesterday with little movement between the pair and it continues much the same this morning with sterling edging just a shade higher.

• The aussie is unable to break resistance against the US dollar, which is also preventing the Australian currency from breaking higher against the pound.
• Even with solid bond auctions in Europe, softer equities in Asia and some weak figures from the US led investors to the risk adverse route.
• This morning trading has continued to be light and has shown little conviction to move in any particular direction with the price continuing to hang around 1.71.
• There is no data from Australia over the coming days and only public borrowing figures from the UK are being released today, which should have a limited impact on this currency cross.
• Data from Australia will also be sparse next week, but the US interest rate decision and wider market movements will provide direction for the aussie, which we expect to remain under pressure.

 

 

New Zealand Dollar

 

This pair continues to move in a similar range to sterling/aussie with the pound tightly range bound and the trend appears little changed today.

• Conflicting sentiment along with light trading left the kiwi range bound yesterday, with the pound only able to make hesitant gains following solid sales figures.
• Traders are now waiting for data next week when New Zealand's first-quarter current account and GDP figures are due to be released.
• The economy is expected to have grown by 0.5%, which should keep the kiwi trading on a solid footing, barring any unexpected shocks, with the market still bullish on the prospects for rate rises in New Zealand.
• At present the price is holding just above 2.10.

 

 

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