Daily Update On The Foreign Exchange Markets 15/06/09
Posted: Monday, June 15, 2009
by Phil Bennetts
Foreign Exchange Explained
GBPEUR/GBPUSD
Following on from last week, t he 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.
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 has added 13% since the end of March, as data last week showed that consumer confidence and house prices increased more than economists forecast. 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.
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.
The Pound recorded its biggest weekly advance against the Euro since January, while gilts plunged and government bonds declined, amid increased speculation that the economy maybe set to recover from a recession that projected a 4.1% contraction in growth. The UK housing market is showing tentative signs of "stabilising", while a number of economists believe that the economy may stop contracting in the second quarter.
The Bank of England warned on Friday that the UK housing market slump has mired as many as one in 10 homeowners in negative equity, as their mortgages exceed the value of their properties. Paul Fisher, Bank of England markets Director, said that "although it would be very nice to say the worst is over, we should not be complacent --there are likely to be bumps in the road ahead."
The Pound was unable to push back above $1.6600 against the Dollar on Friday, weakening sharply back towards the lows below $1.6350, as stocks declined and increased the allure of Dollar denominated assets. There was a wider Dollar recovery, while an element of profit taking also came into play, after the UK currency rose to the highest level since November.
Underlying confidence in the UK economy remains firmer following the recent run of favourable economic data and this will probably curb any sustained selling pressure. The overall lack of confidence in the major rivals will still tend to provide important protection to Sterling unless there is evidence of renewed deterioration in the domestic recovery.
The Pound continues to trend higher against the Euro, despite reports from the Confederation of British Industry that the UK economy won't start growing again until 2010 and the Bank of England may need to expand its asset insurance program to kick-start the recovery. Gross domestic product will fall 0.3% in the second quarter and 0.1% in the third, before stalling in the final three months of the year.
In terms of economic data, the main focus this week will fall on the minutes from the Bank of England's last policy meeting. The Monetary Policy Committee elected to keep interest rates unchanged at a record low of 0.5% and neglected to increase quantitative easing measures that have undermined the Pound in recent months.
Elsewhere, the BoE governor Mervyn King is due to deliver his annual Mansion House Speech on Wednesday and investors will be scrutinising his comments on the current economic climate. It's also a key week in terms of data with the latest consumer price index expected to show a sustained downward trend, while retail sales are expected to up 0.4% on the month.
The Pound's upside momentum may come under pressure this week, amid the comments from Mervyn King and the latest inflationary data but the unemployment figures on Wednesday will be of particular concern and will probably reflect the ongoing deterioration in the UK labour market. Nevertheless, the Pound looks to set to retain favour amongst investors, amid speculation that the UK will lead a European recovery.
EUR/USD
The Euro was against unable to hold above the $1.41 level against the U.S Dollar on Friday and slipped to lows around $.13950 in New York. The U.S currency found some underlying support from the Japanese Finance official Yosano's comments that Japan's interest in the dollar was 'unshakeable'. The University of Michigan consumer confidence index edged higher to a reading of 69.0 in June from 68.7 the previous month.
The result of the report was slightly below initial forecasts and there will be some concern that the expectations index weakened, suggesting that the economy could start to deteriorate again within the next few months. In the Euro-zone, industrial production data was weaker than predicted with a 1.9% decline for April and there will be further speculation that the Euro-zone economy will lag behind the rest of the G7 nations, which will limit Euro support.
Data Released 15th June
EU 10:00 Employment (Q1)
U.S 13:30 Empire State - NY Fed Index (June)
U.S 14:00 TICS Capital Inflows (April)
U.S 18:00 NAHB Index (June)
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