Sterling holds steady for now

Not much movement overall by Sterling as the markets paused on selling the Pound. 

This morning we have in fact made some gains back and as we stand we are holding just above the key 1.10 level and 1.50 on GB Pound/US Dollar The 1.50 level on GBP/USD is a crucial level to hold above and will help to steady the ship and prevent further selling pressure. 

This morning we have seen UK PMI data come in much stronger than expected rising to 58.40 compared to the 55 expected and giving the best reading for over 3 years. 

On top of this consumer confidence rose to 80 and a 2 year high as consumers look ahead to a brighter 2010 for the UK economy. The good data this morning was a huge breath of fresh air for sterling giving it a welcome break from the selling momentum.

EUR/USD has picked up this morning beyond 1.36 following the leaked news of an austerity package for Greece totalling 4.8 billion euros. 

There is still uncertainty on the level of support that Greece will receive from the EU and the Greek PM tactically said that the cabinet may turn to the IMF if the EU does not give support. Nice move. If we get further clarity on the level of EU support then this should lift the euro further. 

In addition it will help lead to selling pressure on USD and the JPY and hopefully boost the Pound as confidence improves.

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Sterling crashes through 1.50 to US Dollar

After being sold aggressively across the currency markets yesterday the markets have taken a breather and we now await the next move. 

The political focus with the opinion polls over the weekend indicating that the chances of a hung parliament were much higher. A hung parliament may actually prove successful, however the markets do not like uncertainty and the consensus is that a coalition government will have less political clout to push through the decisive decisions especially in relation to tough fiscal planning which is inevitable.

The Conservatives have come out of the traps today stating that protecting the AAA status is central to their plans- however some feel their proposed aggressive cuts will be detrimental to recovery. 
 
On the other hand Labour propose to wait and cut later but waiting too long could mean that the horse has already bolted and the AAA rating could be lost. So this uncertainty and division is leading to a weaker pound. 
 
Yes this could be good for the UK economy and for recovery but there is a fine line between a weaker pound and the loss of confidence in Sterling and the UK economy- this would lead to a sharp rise in import prices and inflationary pressure especially if commodity prices remain high- not good; this would spill into a pressure on the UK gilt markets and inevitably the UK losing the AAA rating adding yet more pressure. 
 
So you can see the problem that uncertainty is creating. The Pound needs to get back above the psychological 1.50 level against the US Dollar. 

Sterling also lost yesterday on the purchase by Prudential of AIG’s Asian business which led to further selling of GBP and buying of USD in the light of this purchase. 

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Political concerns weigh Sterling down

The Pound has lost ground today as political concerns and the prospect of the Bank of England’s policy meeting later in the week weighed down Sterling.
 

Two UK opinion polls over the weekend showed a general election, which has to held by June, would result in a hung parliament.

This weighed on sterling since many believe that such a result would lessen the likelihood of the UK getting to grips with its rising budget deficit.

Meanwhile, traders were wary ahead of the result of the Bank of England’s monetary policy committee meeting on Thursday.

By midday in New York, the pound fell 0.9 per cent to £0.8740 against the euro, lost 0.1 per cent to Y144.21 against the yen and fell 0.6 per cent to $1.5902 against the dollar.

Meanwhile, the dollar hit a six-month high on a trade-weighted basis, consolidating sharp gains after US growth figures came in stronger than expected last week. 

The figures helped give the dollar an additional boost given that the US currency was already benefiting from increased risk aversion.

Safe haven demand for the dollar was boosted as fears over Greece’s fiscal position and concerns over continued Chinese monetary tightening weighed on risk appetite and global equity markets.

The dollar index, which tracks its progress against a basket of six leading currencies, rose to a high of 79.534, it highest level since July 30. The dollar also rose to a six-month peak of $1.3850 against the euro before paring some its gains to stand down 0.3 per cent at $1.3905 and climbed 0.5 per cent to Y90.77 against the yen.

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Bank pours cold water on economic recovery

The Bank Of England is sceptical about the so called recovery in the economy it emerged today as minutes of its June meeting showed it was united on a decision to keep rates on hold.

Minutes from the Bank's meeting two weeks ago revealed the nine member monetary policy committee unaminously voted to keep rates at their historic low of 0.5 per cent.

The Bank conceded that there had been "positive developments" in the economy over the month and that "the risk of a continued sharp contraction in output in the near term had receded."

However, it indicated that a spate of more upbeat recent economic data about the services, industrial and housing sectors gave less reason for optimism than business groups and commentators have suggested.

"Even if developments over the month had been positive, the increase in confidence apparent in some financial market indicators and some household and corporate sector surveys remained fragile," the minutes said.

"There was no reason to conclude that the medium-term outlook for the economy and thus inflation has changed materially since the Inflation Report had been finalised."

Last week, the Pound surged to its highest overall levels this year as hopes that the British economy is emerging from recession continued to burgeon.

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US Dollar slumps to new lows in credit crunch uncertainty

The US dollar languished at all time lows against the euro and slumped to parity with its Canadian cousin for the first time in 31 years as it succumbed to a sell-off in the wake of the Fed's aggressive rate cut for a third day running. The euro broke through the 1.40 usd level early yesterday and found enough momentum to close in on 1.41 usd.

There were other reasons for the dollar's losses as well. Speculation is rife that oil-rich Saudi Arabia may move away from pegging the riyal to the dollar. The Arab nation did not cut interest rates after the Federal Reserve's 50 basis point reduction Tuesday, further fuelling the rumours.

An article in the Daily Telegraph suggested that the Saudis are preparing to break out of the dollar currency peg, something which would spark a 'stampede' out of the dollar across the Middle East.

Against this backdrop, Fed Chief Ben Bernanke's words that the fallout in the US sub-prime market will continue. Delinquencies and foreclosures in the sub-prime mortgage market are likely to rise further, Federal Reserve Chairman Ben Bernanke warned a Congressional hearing yesterday.

His comments offset any benefit for the dollar from a more upbeat US Treasury Secretary Henry Paulson, who continued to downplay the credit crisis, telling members of Congress that the US is poised for continued economic growth.

Many analysts predict that US rate setters will have to reduce interest rates again to keep US growth on track.

Elsewhere, the Pound recovered moderately after strong UK retail sales data and a better-than-expected manufacturing survey decreased the likelihood that the Bank of England will cut interest rates soon.

The Office for National Statistics reported that retail sales in August rose 0.6 % on the month, just below July's 0.7 % gain but well above analysts' forecasts for a 0.1 % rise.

Meanwhile, there was further good news on the manufacturing sector from a better-than-expected survey from the Confederation of British Industry, while data showing strong money supply growth will make it even more difficult for the Bank to justify cutting interest rates.

Focus yesterday, however, centred on Bank of England governor Mervyn King's testimony before MPs on the Treasury Select Committee where he was grilled on the central bank's much criticised response to the Northern Rock crisis.

Rumours had been circulating that King could be forced to resign over the issue, but in the event King was seen as giving a good account of himself as he shifted the blame onto legislation, especially the Market Abuses Directive, which prevented his 'preferred' measure of using a covert lender of last resort operation.

Some analysts found comfort in King's assertion that the central bank will not be taking short-term options.

Comments from other rate setters at yesterdays hearing also appeared to indicate support for King's view. Kate Barker, the resident housing expert, said UK mortgage repossessions are 'not alarming'' despite recent rises in defaults, adding the housing market remains 'relatively robust.'

Finally, The Canadian dollar reached parity with the U.S. dollar yesterday for the first time since November 1976. This week the CAD rose sharply against its U.S. counterpart after the Federal Reserve announced a dramatic half-point cut in its benchmark interest rates.

The Bank of Canada, meanwhile, has kept its equivalent rates stable. As a result, the spread between U.S. and Canadian interest rates widened, making Canada a more attractive place for German, Japanese, American and other foreign investors to put their money.

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Weak data undermines currency converters

The dollar fell back slightly following weaker than expected weekly jobless claims figures, though losses were limited as a weaker opening on Wall Street heightened investors' risk aversion.

The Labor Department reported 334,000 new claims for the week ending August 25, while economists had predicted 322,000 new claims. That was the most new claims since 341,000 in the week ending April 14 and prompted concerns that troubles in the US housing sector are spreading to the labour market.

However, with financial markets remaining volatile the dollar's fall was relatively low, with investors' attention focused on the weak opening on Wall Street. In the current environment movements in other markets, rather than data are what's driving currencies, and rising risk aversion is helping support the dollar.

Risk aversion supports the dollar as investors withdraw funds from riskier overseas assets, converting them into the US currency.

Meanwhile release of revised US second quarter GDP figures - which revised the annual growth up to 4.0 % from the previous estimate of 3.4 % had negligible impact on the dollar, being largely in line with analyst expectations.

Prior to the data release, the dollar had been firming, boosted by expectations that the Federal Reserve will cut its key Fed funds target rate from the current 5.25% at its next rate-setting meeting on September 18.

Though a prospective rate cut reduces the dollar's yield attraction, the US currency has garnered some support from more hopes the Fed will do enough to prevent the US economy from sliding into recession in the wake of the sub-prime crisis.

Now attention will turn to today’s speech by Fed chairman Ben Bernanke at Jackson Hole, with market participants looking for hints on whether the cut will materialise.

Bernanke is likely to leave many in the market disappointed and play down the prospect of a cut, emphasising that the Fed will only lower rates as the economy slows, and not because of what's happening in the markets.

Meanwhile the Pound continued to climb, boosted by data out yesterday morning suggesting that the Bank of England's 125 basis point rise in interest rates in the space of a year is still yet to bite. Figures from the BoE showed mortgage approvals, a key gauge of future activity in the housing market remained stable at 115,000 in July, unchanged from June and above expectations for a dip to 110,000.

This strength in activity will provide ammunition to the hawks in the Monetary Policy Committee and as such keeps the options open for one more rate hike.

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Rate expectations boost Pound

The Pound climbed to a two month high against the dollar on Monday as the chances of a near term rise in UK interest rates climbed despite a report that suggested UK manufacturing growth slowed in March.

The UK purchasing managers’ index fell from 55.4 in February to 54.4 in March, a larger than expected fall.

Meanwhile, data revealed a sharp rise in UK mortgage equity withdrawal in the fourth quarter. reflecting UK households increasing willingness to translate rising household wealth into a more liquid form of spending power.

The pound rose 0.2 per cent to $1.9730 against the dollar and climbed 0.2 per cent to £0.6779 against the euro.

Elsewhere, the euro was little changed against the dollar at $1.3350 as investors shrugged off a slight dip in the eurozone manufacturing purchasing managers’ index in March.

Analysts said the market’s focus would switch to the US Institute of Supply Management’s survey of the US manufacturing sector, due at 14.00GMT, for clues as to the future path of US interest rates.

The yen was flat at Y117.80 against the dollar and unchanged at Y157.30 against the euro, showing little reaction to Japan’s quarterly Tankan report, which showed Japanese business confidence deteriorating for the first time in a year.

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US Dollar strenthens as Yen hits record lows against EuroYesterday the GBP lost ground against the USD and Euro after the minutes from

Yesterday the Pound lost ground against the US Dollar and Euro after the minutes from the Bank of England’s February Monetary Policy Committee meeting revealed a 7 to 2 vote in favour of keeping UK interest rates on hold at 5.25 per cent.

The seven members that voted for a rate hold felt concerned about delivering rate hikes that were too closely spaced together. They wanted to give the economy time to absorb the latest rate hikes and also wanted to avoid over tightening.

The minutes gave no clues on the timing of the next UK interest rate rise. However, the tone of the discussion was significantly more hawkish than that of the December MPC minutes, which preceded January’s surprise rate rise.

In the US consumer prices were slightly better than expected yesterday which helped to contribute to the overall strength of the USD. Having rallied going into the release of the CPI report, the true impact on the dollar was limited.

The minutes from the January FOMC meeting were relatively upbeat about growth and agreed that inflation risks still remain. Even though another rate hike was not justified at the time, they decided against dropping the tightening bias.

The tone of the statement contained the same degree of hawkishness as the comments made by Fed Chairman Bernanke last week, which should keep the prospects of a rate hike later this year in play.

The Yen tumbled to a record low against the Euro yesterday and lost ground against other major currencies as the Bank of Japan’s decision to raise interest rates failed to boost the currency. The BoJ voted 8-to-1 in favour of raising increasing interest rates by 25 basis points to 0.5 %.

Comments from the BoJ reinforced the market’s belief that despite the increase, interest rates will remain low and any further rate hikes will be delivered gradually.

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Sterling ends losing streak on strong house prices

The Pound advanced against the euro yesterday on expectations that an inflation report released today will show consumer price in the U.K. held near the highest in 10 years last month.

The U.K. currency cancelled out a three-day losing run against the euro following strong data released in the UK yesterday morning, most notable of all was the fact that house price inflation touched a 21-month high in December.

German economic growth was much stronger than expected in the second half of last year, prompting the nation’s federal statistic to revise up its growth estimates. Real gross domestic product grew by a quarterly rate of 0.9% in the last three months of the year, data published early this morning showed.

Finance ministers and central bankers from the group of seven nations urged investors to recognize Japan’s economic recovery could possibly be stronger than they think, warning not to make “one way bets” against the currency.

Japan’s currency slumped to a record low against the euro, increasing concerns among Europe that their exports would become less competitive.

Oil hovered below $58 a barrel early this morning, following yesterdays $2 slide on signs the OPEC will keep output stable when it meets next month. Several OPEC ministers have said there will be no need for output cuts to add to pledged reductions of 1.7 million barrels per day, with Saudi Arabia’s oil minister Ali al-Naimi saying the marker was in better balance.

Gold steadied early this morning following sharp declines yesterday as the dollar lost some of its clout against other currencies. Gold held just above the widely marked technical support level of $660 an ounce, countering some expectations that geopolitical issues may drive the bullion closer to $700.

investors this week have initially been seen putting more money into gold as tensions were seen increasing in the middle east after European Union foreign ministers agreed on sanctions on Iran to raise pressures over its nuclear programme.

The Australian dollar opened weaker today driven by the likelihood that interest rates will stay on hold this year. It is thought that a combination of the Reserve Bank of Australia’s (RBA) softer inflation outlook and US dollar strength against the yen worked against the yen worked against the Australian dollar in overnight sessions.

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