Pound news:
The latest news on the efforts to rein in our budget deficit shows that, in fact, the opposite is occurring. Public sector borrowing came in higher than expected yesterday and a government watch dog has revealed that the Ministry of Defence is already over budget by several millions. Not ideal news for the U.K which is likely to have capped Sterling gains.
Not one to go without a fight the Pound is inching higher against the euro but we still find ourselves trading in the €1.18 level at €1.1875 on the market. The high of the day, 8pips short of €1.19 would suggest that Sterling may retest that area if the upward trend continues.
Sterling has also moved higher against the dollar, after a pretty flat opening Sterling has tested the $1.53 level on several occasions today. Rather interestingly, reports suggest that this move higher is simply a recovery after an erroneous trade sent Sterling lower, known as a fat finger trade in the city. A clear direction for Sterling may arrive after the MPC meeting minutes. Should another member join Andrew Sentance in voting for a rate hike then we are likely to see Sterling rally on the hope of monetary policy tightening in the not too distant future. “MPC member Sentance is expected to have voted for a rate hike at the meeting, but any sign that other members joined him will give sterling a lift,” analysts at Credit Agricole CIB said in a note to clients.
US Dollar news:
The dollar starts this morning broadly down against it major pairs as the market still favours risk as opposed to flight to quality. Much of this renewed confidence comes from improvements in the euro zone so we may start to see some dollar strength once the furore over the bank stress test subsides.
The euro has started to slip from its highs, last night we ended at $1.2908 and this morning sees a dip to $1.2895. Not a huge move lower but many are speculating that the euro rally is coming to an end. The common currency’s recent rally may have outpaced the support the euro is likely to glean from the bank stress tests. The euro has advanced all the way to $1.30 from the four-year low just under $1.19 hit in early June and those gains may have been overdone, analysts said. After a slight slip lower Sterling has also started this morning in the positive by moving ahead 0.35% to trade at $1.5312. This is very close to the highs of the day so we may see Sterling bounce between $1.53 and $1.52 without any news to push it in either direction.
The Bank of Canada raised rates by 25 basis points, consequently CAD has moved higher on the U.S dollar to trade at $0.9650, up 0.71%. Generally speaking the commodity lead currencies are all faring better today but the move lower from the U.S dollar is by no means substantial. Ahead of the stress tests, investors Wednesday and Thursday will zero in on Federal Reserve Chairman Ben Bernanke’s testimony to Congress, dissecting his statement for clues on the Fed’s outlook for U.S. growth, which could offer guidance on the eventual tightening of monetary policy.
Euro news:
As the euro starts to dip ever so slightly lower against its major traded pairs it is likely that the market has viewed the euro rally as overdone. The climb to highs of $1.30 earlier in the week against the dollar was driven purely by rumours that EU banks are capitalised better than expected. However, in an about turn, the markets are now taking the view that if the vast majority of banks pass with flying colours then the significance or importance of the test will come into question. “People are going to take the tests with a grain of salt if they show incredibly strong results for European banks,” said Greg Salvaggio, vice president of capital markets at Tempus Consulting in Washington. “I don’t think the market is going to believe it.” Either way, the bank stress test will be a key event for the direction of the euro and the EU finance ministers must get it right by instilling a sense of calm in the markets whilst maintaining the credibility of the test itself. A snap shot of the market now shows Sterling approaching €1.19, 7 pips shy at 1.1893 so far and at the high of the day, a break through €1.19 will be the key resistance level to look out for.
Quote of the Day
“It does not matter how slowly you go so long as you do not stop.” – Confucius