US Dollar:
This morning sees Dollar strength against Sterling and the Euro as investors took riskier positions of GBP and EUR out of their portfolio before the year end. Expectations of a U.S interest rate increase are still fuelling Dollar sales amidst concerns about deteriorating global credit quality. Demand for higher yielding or commodity related currencies as well as GBP and EUR such as the Canadian Dollar and Australian Dollar were also affected as the Dollar continues to rally against the majors, and may continue to do so for the rest of 2009. There is certainly an elevated concern over credit worries and whilst the safe haven of the Dollar may not be the only reason it is finding strength recently, coupled with relatively thin trading on the markets and many investors closing out their riskier positions, Dollar making gains on GBP and EUR is not beyond the expectations of many currently. EUR/USD down to 1.4731 in USD favour, GBP/USD makes similar reading at 1.6275.
Pound:
Sterling has continued to weaken against a strong USD, trading down into the higher end of 1.62 and is moving within tight ranges against the Euro ahead of Mr Darling’s speech at lunchtime. Many in the market are expecting the pound to come under pressure as the UK Chancellor delivers his strategy for reducing government debt and protecting our triple A credit rating. The problem is that Darling has already said he will not sling the axe just yet, hinting that cutting deficits at this moment would be counterproductive. “Let’s get the recovery started first and the cut borrowing” he said. This stance will place more pressure on our deficits and threaten the UK’s ratings for the sake of pulling us out of the current recession.
These comments by Darling leading up to the speech and his priority of getting the economy back on track may well be more supportive of sterling in the short term as focusing on this rather than large rises in taxes (to fill in the current hole) would normally see sterling dumped by investors. Putting this to one side we need to remain cautious over the pound’s value as although ranges against the Euro and USD have been relatively tight since October our currency is still living on a cliff edge.
The U.K. banks’ exposure to Dubai is continuing to linger, and sterling’s close correlation to bank shares makes it vulnerable as shown in yesterday’s trading. We also have to consider yesterday’s economic data which saw weaker-than-expected readings for industrial production and manufacturing output in addition to a disappointing reading of UK retail sales. Trade balance data just out for the UK was slightly worse than expected at –7.1B against –6.9B forecast. Make sure you get the sandwiches in before 12.30 this should be an interesting one!
Euro:
The Euro held firm against Sterling this morning, pre budget speech by Alistair Darling at parliament, but was pushed even lower against the Dollar as expectations of a U.S rate increase and investors pulling out of the Euro to balance their books and reduce their risk before the year end prevailed. Sterling was held back against the Euro with little change as traders wait for the impact of Darling’s rhetoric at 12.30 GMT today. In early European trading this morning global markets were feeling the strain of a fresh wave of nerves over risk. Periods of stress such as this usually boosts safer bets such as the Dollar, while the Euro, viewed as a riskier proposition for investors, will often find itself under pressure as it is against the Dollar this morning.
All eyes on Darlings speech today, but the outlook remains bearish and consequently not upbeat for Sterling against the Euro, as well as other currencies. EUR/USD 1.4731, GBP/EUR unchanged before the speech at 1.1040.
Quote of the Day
“Time is the most valuable thing a man can spend.” – Theophrastus