Sterling Stages Remarkable Comeback

Market Summary 22^nd October 2009

After coming under huge pressure in the last six weeks, Sterling stages a remarkable turnaround to post it biggest weekly gains in over a year against a host of currencies.

Sentiment turned on suggestions that the asset purchase programme which the BOE have been undertaking since the start of the year is beginning to work. This was offered further credence by the BOE minutes released on Wednesday where the MPC voted unanimously to keep both interest rates and QE expansion on hold for October. Yet they have left the door open for further expansion down the line but in the short term it seems the market was intent on offering Sterling some relief and was more than happy to take this as Sterling positive.

The long term health of Sterling remains a hot topic.  To this end the state of the public finances and the ability of the financial sector to recover will be the major factors in determining Sterling’s future.

The US Dollar has also come in for a hard time in recent weeks but with sentiment in the equity market beginning to turn, this may lead to a default into the greenback. Third quarter earnings have so far come in slightly better than expected. However it is clear that these figures are not down to increased sales but rather a product of the extreme cost cutting we have seen in the last 12 months. This is unlikely to offer the market much reassurance and a correction in equities seems overdue. If this is the case, expect the JPY, USD and Euro to gain in the next few months.

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

House Prices have Little Impact in helping Buoy Embattled Pound

Market Summary 2^nd October 2009

By David Lamb – Head of Treasury Services

Risk trends continue to determine price patterns in the currency markets with data releases having little impact. Therefore Nationwide House Prices, which came in better that expected on Friday, had little impact in helping buoy the embattled pound.

With the global economy showing continued signs of recovery, equity markets remain strong. However further signs of problems ahead particularly in the financial sector could see a correction after a six month bull run. With this in mind the US Dollar and Japanese Yen could strengthen on a fresh wave of risk aversion.

At this moment Sterling is the sick man of the global currency market with the growing public debt and turbulence in the financial sector particularly damaging. Added to this comments by the BOE Governor that sterling weakness is helping to rebalance the economy certainly has not helped.

Of the majors the Euro is looking quite strong and with an expectation that the ECB will be the first central bank to increase interest rates, then Euro strength could be recurring theme over the next few months.

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

Market Summary 17th September 2009

Dollar slide fails to inspire sterling

By David Lamb, Head of Treasury Services at No1 Currency

Despite the US dollar falling to its lowest levels for the year against most of its major trading partners, sterling is lagging sadly behind as both macroeconomic and political news weigh on the currency.

With investor confidence in a global recovery seemingly rising by the day, further indications this week of the UK falling behind these recovery projections came from Bank of England Governor Mervyn King. He stated the Bank may cut the rate paid on deposits, noting this could be a ‘useful supplement’ to monetary policy which provides further evidence that the MPC are a long way off from the exit strategy from accommodative rates that appears to be the case elsewhere around the globe.

It could however be argued that this stance will put the UK on a firmer footing going forward should the world encounter the dreaded double dip recession that many feel is a receding possibility.

As things stand, sterling has fallen to a four month low against the euro which in turn is making 12 month highs against the dollar. Meanwhile, as the pound and dollar battle it out for the dubious accolade of being the weakest of the major currencies, sterling is trapped in the middle of the broad 3-month 1.58/1.70 range against the greenback but would appear biased to the downside following the 26% rise in value from January through to August.

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

Market Summary 10th September 2009

Sterling continues to struggle

By David Lamb – Head of Treasury Services

A relatively quiet week in the markets with few data releases of note. The BoE interest rate decision on Thursday will see the main event risk of the week. Rates are almost certainly to be kept at 0.5% but attention will focus on whether they expand their asset buying program. If they do then it is likely that sterling will come under further pressure.

While sterling continues to struggle, there are signs that we are seeing signs of recovery in the UK economy. Manufacturing and investor confidence data both surprised on the upside this week and this may auger well for stronger mid-term performance for the embattled pound.

The commodity currencies continue to perform well as sterling as hit multi year lows against the NZD and AUD. They have no doubt been buoyed by the improvement in equity markets and higher commodity prices. However there is now a belief that they are over-priced and correction looks increasingly possible in the weeks ahead.

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

Market Summary 3rd September 2009

A tough week for sterling

The pound has continued to drift around the lower end of recent ranges over the last week, further hindered by the news last Thursday that business investment in the second quarter slumped by 10.4%, the steepest fall since 1985. Even worse, the year on year reading was down 18.4%, the worst since records began in 1967.

Earlier this week, news that July’s encouraging return to growth in the manufacturing sector failed to extend for a second month saw sterling fall to a seven week low against the US dollar and hover around three month lows against the euro.

There were some concerns this disappointing manufacturing result could spin over into the important UK service sector PMI released earlier this morning but these have proved unfounded with a fourth consecutive expansion delivered on a 54.1 reading.

The pound is now staging a recovery on the back of a less buoyant dollar while against the euro, for now at least, the persistent probing of important support around €1.1250 has been met with staunch defence.

Looking ahead, it will be important for this £-eur level to hold up to prevent a breakdown of the 8-month positive trend. Against the dollar, the more than 5% fall over the past month has already undermined the bull trend which began in earnest back in March. Above 1.6575/1.6625 is needed to relieve some of the near term downside pressure which currently threatens to extend towards 1.60/1.58.

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

Market Summary 27th Aug 2009

Sterling losing ground

The pound has lost its shine over the course of this month with the Bank of England decision to increase its asset purchase program and last week’s poor government finance figures continuing to weigh heavily.

The only data release of note this week has been the BBA loans for house purchases and despite this hitting a 17 month high, sterling’s fall from grace has continued. Against the dollar, the pound has now lost around 5% from the 1.7040 highs seen at the beginning of the month and 4% against the euro over the same period.

Expectations of future UK interest rate hikes have been pared back following recent Bank of England activity. The market was surprised enough with the additional £50bn of quantitative easing but the minutes of the meeting revealed that three members of the committee, including Governor Mervyn King, voted for a £75bn extension. The inflationary implications together with concern over the affect of exiting this increasing amount of QE look likely to undermine sterling for the time being.

Short term, we can see the pound losing around another 1% of its value with levels of $1.60 and €1.1250 looking like realistic downside targets. The latter would represent a test of the 8-month bull trend but in the case of the dollar, we have already seen the pound break below a five month trend line which adds further weight to the near term bearish outlook from a technical perspective.

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

Market Summary 20th Aug 2009

Pressures lie ahead for the sterling

Another week of high volatility as GBP/USD breaks through 1.65 after tailing off toward 1.62 earlier in the week. Sterling has been buoyed by better than expected retail sales figures which have come in for a second consecutive month in positive territory. However with unemployment likely to increase over the coming months it is not clear whether these figures can be sustained in the longer term.

Sterling remains in a tentative position and speculation that the Bank of England will expand its asset purchase scheme will do nothing to aid a sustained improvement. The news that 3 members of monetary policy committee voted for an extra 25bn shook sterling on Wednesday but it is managed to regain the majority of the losses in early morning trading.

Sterling is still struggling against the commodity currencies and is flirting with multi year lows against the AUD and NZD. It is difficult to see how these levels will be sustained particularly if we see an end to the Bull Run in equity markets which has helped strengthen the so riskier currencies in the past six months.

 

For more information please contact John Dolan, analyst at No1 Currency on 0131 561 8416

Market Summary 13th Aug 2009

UK jobless at 14 year high

Despite some encouraging signs, in particular from recent manufacturing and service sector indices, one of the major drags on the UK economy reared its head again yesterday with the release of the latest set of unemployment figures. Although the actual number of job losses was a little better than feared, the jobless rate now stands at a 14 year high and is set to continue rising towards or even above the 3 million mark into next year.

Also released yesterday was the latest Bank of England quarterly inflation report. Interest in the report escalated following last week’s surprise £50bn increase to the quantitative easing program as investors sought the reasoning behind the decision. In the event, undershooting inflation appeared to be the prime driver in the move with Governor Mervyn King stating it was ‘more likely than not’ that CPI would drop below 1% later this year. 

Although far from clear, the likelihood is that this latest hike in the asset purchase program will be the last. Unemployment will continue to rise as it traditionally lags economic recovery and, for now at least, inflation will fall. A whole new set of problems will arise in the future when inflation begins to rise and policy accommodation has to be scaled back. Raising interest rates will form part of this process but there is also the question of an exit strategy from the ever increasing asset purchase program. The timing of these measures will be crucial to the recovery as the Bank focus will then be on to stop inflation spiralling out of control.  

 

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

Market Summary 6th Aug 2009

UK Manufacturing Sector Expands

Sterling has outperformed over the course of the last week as we continue to see encouraging forward looking indictors from the UK. In the past few days, a further small expansion in the service sector was announced which came on the heels of the welcome news that the manufacturing sector has returned to expansion for the first time in 16 months. Consumer confidence is also on the rise with the Nationwide index climbing to 60 last month, the highest since May last year.

Later today, the Bank of England will announce their latest policy decision with interest rates certain to remain at 0.5% for the fifth consecutive month. Of more interest to the markets will be their decision on quantitative easing. Last month the MPC surprised markets by announcing a pause in the asset purchase program and the full £125bn already allocated has now been utilised.

There are effectively three options open to them today. The committee could opt to pause the process for another month, take up the remaining £25bn available under the current agreement or take up and £25bn and request more. The latter is highly unlikely given recent encouraging data from some sectors. Although opinion is split on the other options, we would expect a further period of reflection from the Bank but they are likely to clarify this decision by stating that the process has not necessarily ended.

As we head towards the lunchtime announcement, sterling is trading just beneath US$1.70 and €1.18, both within touching distance of the 2009 highs.

 

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416

Market Summary 30th July 2009

Sterling firms despite latest growth figures

The pound has recovered from its initial negative reaction to the release of another alarming set of GDP figures at the end of last week where the UK economy fell at a rate of 0.8% in the second quarter, far worse than consensus.

After a sluggish start to this week’s trading, sterling has since recovered its composure. Poor German data yesterday, where annual inflation turned negative for the first time since reunification in 1990, has further boosted the recovery in the pound and we are currently trading back at four week highs against the single currency close to €1.1750.

A slightly different tale to tell where the US dollar is concerned where a sudden decrease in investor risk appetite has seen the dollar gain across the board as it takes on its customary safe haven status. That said, the pound sits only a little over 1% off its year highs set towards the end of last month and over 20% off the $1.35 lows posted at the beginning of the year.

While these latest developments are encouraging for sterling generally, and may finally be the catalyst required for a renewed assault on the psychological 1.20 level against the euro, the more risk adverse environment is unlikely to provide a platform for fresh nine month highs against the dollar.

Next week brings the latest Bank of England MPC meeting where interest rates are almost certain to remain at 0.5% but all eyes will be on the committee’s decision regarding quantitative easing. Last month’s decision to pause the asset purchase program came as a surprise to many and the latest set of GDP data will only increase the expectations that the Bank will vote to expand the program next week.

 

For more information please contact David Lamb, Head of Treasury Services at No1 Currency on 0131 561 8416