Moneycorp: Sterling's Resilience Shines Through
November 5th, 2009
Sterling’s resilience shines through. Have we all forgotten the previous week’s appalling UK third quarter GDP performance?
Following the previous Friday’s dismal UK GDP figure, there was every reason to suspect the pound would have to face the full force of economic law and aggressive selling from worried FX traders at the beginning of this week. Neither happened and the fact that we saw no new evidence of worsening economic conditions meant the pound duly recovered a good half of its losses against the other major currencies.
Having opened at 1.0854 against the euro, there was only a slight dip into Monday morning, before this recovery kicked in, rebounding to just under €1.10 by the afternoon.
Tuesday saw further gains for the pound against the dollar and the euro, as a Confederation of British Industry report showed UK retail sales climbed to the highest level in almost two years.
On Thursday, net UK mortgage lending was as expected. The rates were therefore influenced by the strong US Gross Domestic Product (GDP) reading, which saw an annualised growth of 3.5%, confirming that America is officially out of recession.
This saw a resurgence in risk appetite and the pound subsequently gave back some of its gains from earlier in the week, whilst holding its ground against the US dollar. This move proved relatively short-lived however, as the markets read between the lines of the GDP figures and the trends from earlier in the week resumed.
With this week dominated by the Bank of England rate decision and accompanying statement on quantitative easing, trading in sterling is likely to be choppy. Significant moves are less likely in the build-up and even after the decision itself, there could be a muted response while the markets wait for the quarterly inflation report released on Wednesday 11 November.
There was little data of note from the eurozone last week and, subsequently, the single currency was at the mercy of news from elsewhere.The primary influence was the growing belief that we are coming towards the end of the stock market bull-run, and that present monetary stimuli are likely to be withdrawn in most major economies in the relatively near future. As a result, short positions in the dollar, sterling and yen were closed out, which lead to euro selling.
The major cross that markets watch is the EUR/USD rate, which had been trading over the psychological 1.50 level through the end of last week and into Monday. After the rate broke back below that level on Monday, stop loss orders were triggered and the pound was able to appreciate against its continental counterpart. This was key in allowing sterling to breach the 1.11, although follow-through came to a halt near 1.12.
The small amount of data we did have was largely negative. German consumer confidence was lower than forecast and down on last month, when a gain had been expected. M3 Money supply was also lower than forecast – which is positively correlated with interest rates – so a weak reading only served to further hamper the euro.
Some other minor German data was on or just above expectations. However, this was not enough to turn the tide, as investors unwound their recent trades and awaited the important GDP figure from the US on Thursday. As mentioned, this figure showed a strongly positive reading, so risk appetite returned to the markets and the euro recouped some of its losses.
Friday morning’s flash inflation estimate and Europe-wide employment figure were both on expectation and did not influence the market. Euro movement this week will also be dominated by the central bank interest rate meeting and subsequent press conference on Thursday, with no other data of any real significance due for release in the build-up.
With sterling widely considered undervalued – especially against the euro – we may see the current levels hold, although it is unlikely we will see any significant rally until the market is confident that the Bank of England has finished its quantitative easing measures.
With so much uncertainty surrounding the upcoming decisions from both the UK’s Monetary Policy Committee (MPC) and the eurozone’s European Central Bank (ECB), it is certainly prudent for buyers of the euro to hedge half their requirement with a forward purchase. Anyone selling euro should still view the current levels as attractive, considering that just two years ago, it would have cost you €1.40 to buy £1.00.
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