Daily Update On The Foreign Exchange Markets 10/06/09
Posted: Wednesday, June 10, 2009
by Phil Bennetts
Foreign Exchange Explained
GBPEUR/GBPUSD
The Pound bounced back against the majors yesterday, rising towards the highest level in almost a week versus the U.S Dollar, as overall confidence in the UK economy remained slightly stronger following recent favourable trends in the housing sector. The Royal Institution of Chartered Surveyors reported that the UK housing market is "stabilising", stoking optimism that the worst of the recession has past.
The Nationwide Building Society and Halifax have both reported that home values climbed in May, as evidence mounts that the property slump is past its worst. However, the Deputy governor of the Bank of England Paul Tucker said yesterday that the outlook for the UK economy may remain "unclear" until the third quarter.
Ian Perry, a spokesman for the Royal Institution of Chartered Surveyors, said in a statement that "on the face of it, the housing market does appear to be close to bottoming out with activity picking up in a material way and prices at last stabilising. However, it is important to remember that the lack of supply has been as important in underpinning prices as the rise in demand."
Lloyds Banking Group Plc's Halifax business says that house prices increased 2.6% in May, the most since 2002, while the Nationwide Building Society confirmed that price increases matched the biggest gain since 2006. A separate report from the British Retail Consortium showed that retail sales at stores open for at least 12-months still fell 0.8% in May, as the economy shrank 1.9% in the first quarter, the most since 1979.
The Bank of England elected to keep UK interest rates on hold at 0.5% last week and reiterated plans to spend 125 billion in newly printed money in UK debt markets to help bolster the economy. The Central Bank said yesterday that it may widen the range of assets it's buying to include secured commercial paper.
The Pound also rose versus the Japanese Yen yesterday and rallied towards the highest level this year against the Euro, amid speculation that Gordon Brown has fended off calls to step down, following a series of ministerial resignations and a drubbing in the local and European elections. Gavin Friend, a market strategist at National Australia Bank, said that "the housing data and the improvement in Gordon Brown's fortunes for the time being are providing support for the Pound."
The renewed appetite for risk also saw UK stocks stabilise after three days of declines and the FTSE 100 Index was little changed after the housing report. While a gain in oil prices boosted energy producers, offsetting concerns that a three-month rally has outpaced earnings expectations. The benchmark FTSE 100 Index slipped less than 0.1% and has surged 25% from this year's low on March 3rd.
The Pound rallied 1.3% against the Dollar yesterday, and rose to a high of $1.6400 this morning, as the improvement in risk appetite encouraged investors to reduce their holdings of dollar denominated assets. The UK currency also rose 0.6% against the Euro to a high of 1.1640, as Gordon Brown's rousing speech won the support of most Labour lawmakers by promising to make unspecified changes to his leadership style and agenda.
David Bloom, global head of currency strategy at HSBC Treasury & Capital Markets in London, said that "1.60 is par value, there is no reason the U.S and the UK shouldn't fight it out to an absolute draw where both economies look identical in terms of quantitative easing and some signs of life in terms of a recovery."
The UK industrial and trade data will be watched closely on Wednesday and evidence of stabilisation in the manufacturing sector would provide some further degree of support in Sterling. The Pound also gained yesterday despite fresh concerns over the UK labour market, as Lloyds Banking Group Plc announced plans to cut as many as 1,660 full time jobs and shut all of its Cheltenham & Gloucester branches.
EUR/USD
The Euro found support below $1.3900 against the Dollar on Tuesday and then advanced steadily throughout the course of the day. There were no major data influences during the day, but there were a series of small factors which provided support for the single currency. Immediate concerns surrounding a substantial currency devaluation in Latvia eased, following remarks from the government that it was out of the question.
The news temporarily erased concerns over the European banking sector for the time being and helped support the Euro, despite reports that German exports declined and industrial production fell by much more than the expected 1.9% in April. The Dollar declined against almost all of the 16-most actively traded currencies and for the first time against the Euro in three days, amid speculation that the global recession may be ending.
Goldman Sachs Inc recommended that its clients buy the Euro against the Dollar, citing a recovery in global growth expectations and a "broader pickup" in demand for higher-yielding assets. Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp, said that "investment is slowly leaking out of the Dollar, into emerging markets and other higher-yielding countries on signs of a green-shoot recovery."
U.S economic data recorded a rise in the IBD consumer confidence index and a drop in wholesale inventories for the eighth consecutive month. The Dollar struggled to find any support on yield grounds with a lack of conviction that the Federal Reserve will move towards higher interest rates in the near-term.
Data Released 10th June
U.K 09:30 Industrial Production (April)
- Manufacturing
U.K 09:30 Trade Balance (April)
U.S 13:30 International Trade Balance (April)
U.S 19:00 Federal Budget (May)
U.S 19:00 Federal Reserve Beige Book
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