UK retail sales forecasted to show increase to 0.5%

December 17th, 2009 by Toby

US Dollar:
The Dollar was up on a three month high against the Euro this morning after concerns over European bond markets and the slightly hawkish U.S FOMC statement last night. Many traders see a further fall imminent on EUR/USD if December’s Philadelphia Fed manufacturing Index due later today is better than expected.

Traders have been buying the Dollar after a U.S rating agency said it may downgrade programs to place Creditwatch on EUR1.46 trillion worth of covered bonds. Covered bonds are a way of raising funds, often used by European banks due to the low cost. A rating cut would mean European banks may find it hard to raise funds in the near future, spurring risk aversion. The news wasn’t enough to see the Dollar gain against Sterling however, as encouraging UK employment figures helped it maintain its gains against the Dollar, at least for the near term. GBP/USD 1.6163, EUR/USD 1.4382

Pound:
The pound is continuing to take full advantage of the Euro-zone “slipping up” trading into the higher end of 1.12, for the short term at least. Against the USD however, sterling is continuing to struggle and is failing to hold above a recent break it made into 1.63, trading into the bottom of 1.62. In the short term sterling has benefitted from an improvement in the latest RICS house price index, an upturn in inflation and the first fall in the jobless claimant count which even if it for a short while has created some positive vibes surrounding the pound amongst the currency markets. This has helped sterling “hold its own” against the Euro and take a turn for the better in recent days after poor data from the euro zone alongside worries about the regions’ own banking problems have helped see the pound make some gains. Unfortunately this recent strength is unlikely to last and here are some reasons why.

Firstly concerns about the euro zone are likely to evaporate or certainly seem less severe than our own economy and government debt, seeing current risk hungry investors dump sterling once again.

The UK housing market is still under pressure from a lack of new buyer enquiries and activity easing off, especially as unemployment amongst the young remains high and first time buyers are in short supply, spelling problems longer term. A recent rise in inflation is only expected to be short-term with the rate expected to fall again medium term, leaving the Bank of England able to concentrate more on promoting growth rather having to worry about rising price pressures. The employment market remains under severe stress in the UK as companies continue to cut costs to survive as highlighted by Vicky Redwood, U.K. economist with Capital Economics in London. “a second leg downturn in the labour market remains a key risk for 2010,”.

Lastly with the UK likely to be last out of the Euro-zone and US to start raising interest rates again, investors are likely to move money into bonds from these regions rather than the UK, allowing the pound to remain weaker for a while yet. In some interesting news for UK manufacturing retro bicycles are in, traditionally styled bicycles with names like the Roadster Sovereign, Princess, Guv’nor and the Sonnet Pure are flying out the factory doors of England’s longest-running bicycle manufacturer, Pashley Cycles, keep it British!

Euro:
The Euro plunged to its lowest level against the Dollar since September, and was down against Sterling this morning after a second credit agency downgraded Greece’s sovereign status. The move, from Standard and Poor was compounded by concerns over Austria’s financial sector and year end dollar demand. There were also continued concerns over a European economic recovery and the ease with which European banks would be able to raise funds after a pessimistic credit watch by Standard and Poor. The single currency lost ground on Sterling after GBP was given a boost by encouraging UK employment figures. With investors looking towards interest rate increases in countries to invest in their currencies, GBP may not be on the front foot against the single currency for long though. GBP/EUR 1.1236, EUR/USD 1.4382.