Analysis

24th June 2010

 

 

Sterling / Euro

 

The pound hit a fresh 18-month high against the euro yesterday following a surprise vote from a member of the BoE's Monetary Policy Committee.

• The minutes from the MPC's latest meeting, two weeks ago, revealed that one policymaker, Andrew Sentance, voted for a rise in rates this month, the first vote for tightening in nearly two years.
• Although the BoE has repeatedly downplayed the risks of inflation, reiterating the stance that the headline rate will drop back below the 2.0% target, Sentance's vote marks obvious concerns that the rate needs to be reigned in sooner rather than later.
• The vote outcome added to sterling's upside moving the price to 1.2150, though many argued that calls for higher rates were unlikely to grow given the period of deep austerity ahead.
• In trading this morning, sterling has capped its gains as dissent against the emergency budget grows more vocal.
• The government has been accused today of taking a chainsaw to public spending "above and beyond" what was needed.
• However, the pound is still trading comfortably above 1.21, and we imagine that there is further upside potential in the near term with Trichet's latest effort to restore the credibility of the euro having little impact on the market.

 

Sterling / US Dollar

 

The pound hit a six-week high against the dollar yesterday, buoyed by comments from a ratings agency and a hint of an early rise in interest rates from the BoE minutes.

• Running against widely held expectations, the minutes did not reveal a unanimous vote to keep rates on hold. Sentence's sole dissenting voice gave the pound an early boost, lifting the price over $1.49.
• Sterling was further supported after Moody's said that Britain will retain its triple-A credit standing if it successfully implements the fiscal tightening outlined in the Budget.
• The comments eased concern over the UK's economic outlook but the pound may struggle to significantly extend gains on expectations that the government's austerity measures will hamper economic growth in the longer term.
• Indeed in trading this morning, having briefly touched $1.50, sterling has dropped back with concerns growing that Osborne's cuts, which suggested Britain's underlying deficit would be turned into surplus by 2015, had gone too far.
• $1.50 is also a stiff resistance level, offering an obvious selling point for investors taking profits and the pound could struggle to break through in the short term.
  

 

Euro / US Dollar

Having slipped back during the early session, the euro recovered strongly to close back above $1.23 against the dollar.

• The dollar came under pressure after data showed sales of new US homes tumbled by more than expected to a record low in May.
• The disappointing figure followed weaker-than-expected housing data from earlier in the week, and saw the dollar pull back across the board as investors reevaluated the strength of the US recovery.
• Later in the session, the dollar was further undermined after the Fed offered a less optimistic assessment of the economic recovery in a statement following their interest rate decision.
• Whereas the rate remain unchanged at <0.25%, the Fed pledged to keep rates low whilst also saying that they merely see the recovery proceeding as opposed to continuing to strengthen.
• In trading this morning, the comments have held the dollar, though renewed sovereign debt worries in the eurozone have capped the single currency's gains with the price holding at $1.23.

 

Rest of the World

 

Australian Dollar

 

Sterling maintained its upward trend against the aussie yesterday, gaining over a cent in line with its broader market gains.

• Although dissent surrounding the UK Budget is very apparent, positive words from one of the ratings agencies gave sterling a boost.
• In addition, weaker equity markets again put pressure on the aussie whilst some disappointing figures from the US put a further cap on demand for risky assets.
• In trading this morning sterling is continuing to climb, with the price nearing 1.72 though demand for the aussie dollar should remain solid following the appointment of a new Australian prime minister.
• Julia Gillard replaces Kevin Rudd as PM ahead of G20 Summit in Toronto, which has fuelled hopes of an early resolution to a dispute over mining taxes that has troubled investor sentiment.
• We expect the financial markets to take the leadership change relatively well, but amid the risk adverse environment sterling should continue to edge higher.

 

 

New Zealand Dollar

 

The pound dropped back nearly a cent against the kiwi dollar yesterday as some positive figures from New Zealand buoyed optimism about further interest rate rises.

• The latest current account data showed that the country moved back into surplus in the first quarter, against expectations for a 0.3 billion deficit.
• As ever though, broader macro concerns stemmed the kiwi's gains and sterling has moved over a percent higher in trading this morning.
• Data showing that the New Zealand economy grew by 0.6% in the first quarter has had little impact with rising levels of risk aversion dictating direction.
• At present the price is back near 2.12 but with the market still pricing in further interest rate rises this year in New Zealand, sterling's upward trend could prove fragile.

 

 

 

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