Pound:
Sterling although trading lower against the USD is continuing to trade higher against the Euro and heading towards 1.15. Yesterday’s rise in CPI has supported views that our central bank will pause again on QE (money printing). Mervyn king speaking last night confirmed the latest rise in inflation did not alter the BoE views that increases in inflation will be temporary. He also confirmed that until conditions become clearer there is no decision on when QE will end in the UK. The Euro was provided further weakness yesterday after we saw a bigger than expected decline in German investor sentiment in addition to the ongoing saga over Greece’s public debt.
The pound has taken advantage of British confectioner Cadbury’s being taken over by Kraft and investor’s more comfortable with the political situation in the UK. There are still concerns surrounding the state of UK public finances but this in the short term is not hindering sterling’s performance. In the most up-to-date economic news today’, unemployment figures looked stronger with less people claiming benefits and the BoE nine MPC members all agreed last meeting not to make any changes with regard to interest rates and QE. Tomorrow sees the release of public sector net borrowing data and MPC member Tucker speaking in the evening.
US Dollar:
The Dollar was up against Sterling, Euro and across the board this morning as risk aversion came back into play after Chinese Banks cut back on lending, affecting shares and other markets in the region. The state-run China Securities Journal said China’s banking regulator told several banks to stop extending new loans for the rest of the month. While the regulators denied the report, they did suggest credit growth would be cut back this year, prompting a fall in lending and a possible decline on China share prices. The news led to traders selling off the already shaky Euro and buying back into the less risky.
Even the current strength of Sterling wasn’t enough to hold back the Dollar’s gains. If Treasury yields and share markets rise on speculation that a Republican upset in a special U.S Senate election today could curb Democratic Party-backed financial industry regulations, the Dollar could gain further ground. Republican Scott Brown beat Democrat Martha Coakley, wrestling the seat long controlled by the Democrats, and giving the Republicans the ability to filibuster regulatory and other bills in the Senate. That is likely to be positive for asset markets to the benefit of the dollar, said Mizuho’s Harada. GBP/USD down slightly at 1.6277, EUR/USD down to 1.4208 with Dollar gains against both currencies.
Euro:
The Euro was pushed further down against Sterling and the Dollar this morning as renewed fears over China’s tightening on lending led to risk aversion prompting investors to sell off the Euro. Continued concerns over Greece’s fiscal health, as well as a drop in Germany’s ZEW economic expectations index yesterday all weighed heavily on the single currency. “The Euro story dominated the market (Tuesday),” said Tim Evans, market strategist at brokerage firm Lind-Waldock in Chicago. “The Euro continues to get dumped on with respect to the dollar, so it kind of takes away from risk appetite generally speaking.
The Greece story continues to spill over and there’s a lot of uncertainty surrounding the Euro zone, Evans said. This could be a landmark year for Euro weakness over the Dollar, with some traders suggesting Euro/Dollar to hit somewhere between 1.25 to 1.30 before the year’s end. Whether the Pound will take full advantage of any Euro losses depends heavily on U.K politics in the run up to the election, but the Euro is certainly being tested at present, with any further fiscal concerns from other Euro states such as Portugal spelling bad news for the strength of the single currency. GBP/EUR 1.1470, EUR/USD 1.4208.
Quote of the Day
“You only live once, but if you do it right, once is enough.” – Mae West