Daily Update On The Foreign Exchange Markets 12/06/09
Posted: Friday, June 12, 2009
by Phil Bennetts
Foreign Exchange Explained
GBPEUR/GBPUSD
The Pound rallied to the highest level this year against the Euro, rising above 1.1700 for the first time since December, while the UK currency also found support around $1.6350 versus the Dollar. Government bonds slid, pushing the 10-year yield above 4% for the first time in nearly seven months, after Bank of England policy maker Andrew Sentence said that the UK recession may be easing.
Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG, said that "for a central banker to say the economy is bottoming out is a fair statement. But so far everything is based on sentiment, which can turn pretty quickly. Real-time data, like gross domestic product growth, also needs to improve."
The Pound strengthened as much as 0.6% against the Euro, its highest level since December 2nd, and it also appreciated 1.2% to $1.6556 against the Dollar. The 10-year gilt yield rose more than a percentage point this year, amid signs that the UK economy may recover as soon as this year dampened demand for the safest assets.
The FTSE 100 Index of UK stocks added 13% since the end of March, as data last week showed that consumer confidence and house prices increased more than economists forecast. Martin Weale, a director of the NIESR, said that "I had expected it to be more downward momentum, it seems very possible that the UK will show zero per cent growth in the second quarter. I certainly didn't expect that six weeks ago."
The Pound rose against the majors as consumers' expectations for store prices in the next year increased in May for the first time in three quarters. The survey from the Bank of England also showed that UK inflation in the next 12-months was 2.4% in May, compared with 2.1% in February. The UK currency fell 23% against the Euro and 27% versus the Dollar last year, but the Pound has recovered a lot of ground, amid speculation that the worst of the recession has past.
According to an estimate from JP Morgan Chase & Co, the Pound may extend its gains against the Euro, after breaking through an important technical barrier. A break above 1.1396 was key support from last week's low, following speculation that Gordon Brown was about to bow to political pressure and resign.
Niall O'Connor, a technical currency analyst in New York at JP Morgan, said that "the risks are pointing to an extension of this trend." Support typically marks the lower boundary of a trading range, where buy orders may be clustered. O'Connor has predicted that the Pound will appreciate to 1.1764, the next key area of resistance, a level that marks the 61.8% Fibonacci retracement of the decline since October.
Fibonacci analysis is based on the theory that securities tend to rise and or fall by specific percentages after reaching a new high or low. Traders use these percentages, derived from a so called Fibonacci sequence, to forecast where investors may place present buy or sell orders. The Pound rallied earlier this week, as stocks gains and a government report showed that manufacturing in the UK expanded for a second month.
Underlying confidence in the UK economy remains stronger following the recent run of positive economic data. Although the debt position is still very serious, there is additional protection from weak fundamentals elsewhere in the global economy. In particular, doubts over the Euro-zone outlook is providing additional Sterling support but the political stresses could still be a significant factor and therefore the use of a stop order would be a prudent move.
EUR/USD
The Euro found support around $1.3950 against the Dollar on Thursday and then gained steadily during the course of the day. The single currency pushed towards a high above the $1.4150 level against the Dollar in New York, before consolidating just above $1.41 by the close of trading. Global stocks climbed yesterday, sending the MSCI World Index higher for a third straight day, while oil prices advanced above $72 a barrel.
U.S economic data failed to have a major impact, as it was close to market expectations, although there was a small net positive impact on risk appetite. Retail sales rose 0.5% in May, after revised declines of 0.2% the previous month. Much of the increase did, however, reflect the rise in prices, notably energy, rather than any major spending increase.
The Euro has weakened briefly this morning amid speculation that the Latvian Prime Minister has resigned due to political pressures with the Baltic States. The single currency may come under additional selling pressure over the coming days but held just below $1.4100 level with no major fresh market incentives.
Data Released 12th June
EU 10:00 Industrial Production (April)
U.S 13:30 Export Prices (May)
- Import Prices
U.S 14:55 Michigan Sentiment (June Prelim)
Foreign Exchange Explained
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