US Dollar:
The Dollar made some gains on the Euro and sterling this morning as U.S rhetoric indicated the government’s willingness to strengthen their currency. After months of indifference regarding the strength of USD, U.S officials have now been keen to stress their concern about the dollars decline. While China was critical of President Barack Obama during his visit to China this week, Federal Reserve Chairman Ben Bernanke was quick to stress that the central bank “will help ensure the dollar is strong”. As dollar short buys have been stretched to high levels in recent weeks, there is the suggestion that the market is due for short-covering, supporting a stronger dollar over euro and sterling. Whilst we await Building permits, core CPI data and crude oil inventories in the U.S, the dollar sustains its recent gains against the Euro pushing it back to 1.4915 currently.
Pound:
Sterling is trading slightly down this morning against the Euro after trading up to 1.1317 yesterday as the market favoured stronger UK inflation data. Against the USD the pound is managing to hold above 1.68 after reaching 1.6871 yesterday. The market is now fully prepared for the BoE minutes due out at 9.30am which should provide investors further clues on monetary policy and when Quantitative easing will end. Any signs that the bank is coming to an end with QE will support the chance for interest rates rising earlier. Prospects for the central bank to return to more normal monetary policy is likely to support the pound longer term and make our currency more attractive. It is clear however that the BoE is monitoring recovery closely before further action is taken.
In positive news for the commercial property sector, British land yesterday celebrated the first rise in the value of it portfolio since the start of the credit crisis. However reasons to be cautious remain as highlighted by Chris Grigg, chief executive of British Land, who pointed to a rapid and positive shift in investor appetite for commercial property in recent weeks. But he warned that, just as in the residential property market, supply is not matching the increase in demand. In addition to the minutes released this morning we are also due CBI industrial expectations which asks around 550 manufacturers to rate the relative level of order volume expected in the next 3 months. This expected to be improved from last month’s –51 to –47 with any smaller number likely to support the BoE aim of creating growth and recovery partly through an increase in manufacturing output. Expect sterling to be volatile later this morning whilst the market digests economic data.
Euro:
Weak Japanese shares prompted investors and speculators to sell off the Euro in favour of the safe-haven of the U.S Dollar, leading to losses on the single currency against GBP and USD this morning. A stronger performance in equities could yet convince traders to look again at the higher yielding Euro and lend support to its strength. Currently however USD against EUR looks set to strengthen over short positions being covered and news that European banks face an unsettling removal of easy credit conditions. This downbeat assessment can already be seen reflected in the options market, as implied volatilities suggest the market won’t yield as much as in the past. This could suggest risk is biased towards a bigger slide in the Euro. Events in Europe are also contributing to weaken the single currency. As the ECB reduces liquidity provisions to help European banks through the credit crunch, problems with weaker banks in the system are likely to be exposed, bringing a sharp widening in credit spreads. This could be a major problem for the Euro in the long term. Traders look to ECB President Trichet’s keynote address in Frankfurt for any short term movement. GBP/EUR is currently 1.1264, while EUR/USD wanders back up to 1.50 at 1.4922 but isn’t expected to find strength above it in the short term.
Daily Quote
“The best preparation for a better life next year is a full, complete, harmonious, joyous life this year.” – Thomas Dreier
