Daily Update On The Foreign Exchange Markets 16/06/09
Posted: Tuesday, June 16, 2009
by Phil Bennetts
Foreign Exchange Explained
GBPEUR/GBPUSD
The Pound declined against the Dollar for the second day in succession, falling to a low of $1.6212 in New York, after the Confederation of British Industry said that the nation's economy won't grow until next year. The UK currency also lost ground against the Japanese Yen and Swiss Franc, as the FTSE 100 Index of shares fell the most in more than three weeks, while gilts rose and investors sought the relative security of government bonds.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that "sterling is seen as a global recovery story and markets are still a little nervous about the recovery today. If stock continue to fall and risk appetite is going to be under some pressure, then the Pound will probably weaken somewhat against the Dollar."
The Pound dropped against the lower-yielding currencies yesterday, after stocks dipped 2.6% in London, the most since May 21st, while European shares also declined heavily on the day. The Pound actually gained another 0.7% in value against the Euro, rising to yet another yearly high of 1.1827, amid speculation that the UK is ahead of the Euro-zone in terms of economic stabilisation.
According to estimates from the UK debt management office, Britain plans to sell up to 5 billion of bonds through banks today and the first so called syndication since 2005 comes as the Treasury aims to "220 billion thus year to finance an expanding budget deficit. The Chancellor Alistair Darling said in April that the shortfall in the year through March 2010 will reach 12.4% of GDP, the most among the Group of 20 nations.
The CBI's forecasts for the economy are more pessimistic than those of other economists such as Royal Bank of Scotland Group Plc, who said that the economy will resume growth as early as the third quarter. Bank of England policy maker Andrew Sentence also said last week that the recession may be "bottoming out".
Jane Foley, research director at Forex.com, said that "last week's enthusiasm that the UK may be in the early stages of its recovery continues to lift the Pound, although the CBI's forecasts that recovery will not be seen until the first quarter of 2010 have dampened these hopes. This week's unemployment and public sector net borrowing data could test the Pound's current bull run."
The Pound is currently trading just under the high of the year against the Euro and has been flirting with the support level at $1.6350 versus the U.S Dollar. In light of the reports yesterday and the downside risks surrounding the labour market data on Wednesday, Euro and Dollar buyers are well placed to take advantage of the current rate, or at least place a stop order in the market to protect against an aggressive downside move.
Investors will also be watching the performance of the stock market to gauge the prospects of the Pound resuming its upward trend but with the FTSE 100 Index declining for the past two trading days, investors' appetite for riskier assets will be muted. Nevertheless, JP Morgan and Chase Co still anticipate that the Pound will rise to $1.85 by year-end because the U.S currency is weighed down by the fiscal and current account deficits.
EUR/USD
The Dollar rose by the most against the Euro since April yesterday, after Russia's Finance Minister Alexei Kudrin said that his nation has full confidence in the U.S currency, while a drop in stocks encouraged demand for safe havens. The Dollar advanced against 14 of the 16 most actively traded currencies, after Kudrin said two days ago that is was too early to speak of an alternative to the world's main reserve currency.
The Euro also came under renewed selling pressure, after the European Central Bank said that commercial banks in the Euro-zone may lose a further $283 billion by the end of next year. The Euro slumped 1.9% against the Dollar in New York, to a low of $1.3756, the weakest level since May 21st and the intraday loss was the biggest since April 27th.
The ECB expects the Euro-zone economy to contract by around 4.6% this year and 0.3% in 2010. Inflation is expected to average just 0.3% this year. European finance ministers are under pressure from the Group of Eight nation to subject their banks to public and individual stress tests like the U.S have done.
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Top-level comments on this article: (2 total)Good update Phil! I am sure readers will find this information very useful!
Great article. Well done.I just like it when the pound is strong. I hope the pound gets stronger as I am off to Australia soon and want lots of spending money.
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