Analysis

28th June 2010

 

 

Sterling / Euro

 

The pound held near its 18-month high against the euro on Friday with sentiment toward the UK economy improving off the back of the Budget.

• The tough spending cuts announced by the new coalition government earlier in the week have supported sterling, but the currency is lacking the momentum needed to overcome resistance.
• The Budget has changed the play on the pound by differentiating the UK from other European economies struggling with debt troubles.
• However, the pound's rally is showing signs of fatigue. Although we expect little sterling weakness going forward, the single currency needs to drop against the dollar before this pair can move significantly higher.
• The price remains relatively unchanged this morning, hovering below 1.22 with action in the markets relatively limited.
• It's a quiet couple of days in terms of data and with no new talking points emerging from the G20 Summit over the weekend the currency markets are comparatively flat.

 

Sterling / US Dollar

 

Sterling resumed its upward trend against the US dollar on Friday, gaining steadily through the day to reach back above $1.50.

• A fall in stock markets would previously have been expected to knock sterling back, but on Friday the UK currency continued to gain following some disappointing data from the US.
• First quarter economic growth in the US was unexpectedly revised down to 2.7% from 3.0%, which, although still a comparatively strong figure, was in line with a raft of disappointing figures seen from the US economy recently.
• The revised GDP number is likely to firm up the Fed's desire to hold interest rates low, putting broad pressure on the dollar
• In trading this morning the pound is continuing to trade above $1.50 with the G20 offering a positive review of the Budget, but more positive momentum is needed for sustained gains above $1.50.
• In the near term, with little direction for the markets the price may remain relatively range bound. However of note, there could be a slight fading of the US dollar safe haven play at the moment in the face of dreadful US macro data. This will have to be watched carefully should risk aversion build.

 

 

Euro / US Dollar

 

The euro enjoyed a positive end to the week against the dollar, gaining for the third consecutive day to close at a one-week high.

• The greenback was on the defensive on Friday as weak US data shifted the focus to the sustainability of a US recovery from the eurozone debt woes.
• Data showed that US gross domestic product in the first quarter grew more slowly than initially expected, with the headline figure revised down from 3.0 to 2.7%.
• The downward revision capped a run of poor figures from the US through the week, raising questions about the strength of the US recovery.
• In trading this morning the price remains virtually unchanged at 1.2350 with the day shaping up to be relatively quiet in the currency markets after a muted response to the G20 Summit.
• The focus for the week will be on Friday's US job numbers. Again a weak figure is expected, which could heighten doubts about the US economy, firming up the Fed's decision to hold rates at a record low.

 

Rest of the World

 

Australian Dollar

 

Having hit a two-week high against the aussie on Friday, the pound dropped back in later trade to close slightly lower, but has held its ground this morning.

• The pound spent most the day in positive territory, however, the price headed sharply lower in the afternoon as investors cashed in on profits made during the pound's week-long rally.
• The aussie has stayed under pressure this morning, giving up gains after China set a higher mid-point for the yuan.
• The Nikkei again trended lower over night, which has seen higher-yielding currencies sold enabling the pound to creep higher.
• The G20 summit offered few announcements of interest over the weekend, but the general commitment to fiscal austerity has offered some support to growth-linked currencies and could stall the pound's near term progress.
• At present the price is holding above 1.72 and with little data due, we expect to see the equity markets continue to dictate this pair.

 

 

New Zealand Dollar

 

Sterling is continuing its upward movement against the kiwi this morning following data that showed a dip in New Zealand business sentiment.

• Having closed above 2.11 at the end of last week, the pound has now pushed over 2.12, currently one and a half cents higher on the day with the kiwi under broad pressure.
• An index of business confidence in New Zealand returned a much lower number than expected last month. The survey showed the second monthly drop in a row, which has raised questions about the durability of the central bank's policy to raise interest rates.
• In absence of major local data and a close watch on indicators out of the US in particular, we expect to see the kiwi trade in line with global sentiment over the course of the week.

 

 

 

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