Pound:
A new decade and sterling is trading stronger this morning against the majors before this morning’s first economic data release of the year, Manufacturing PMI is forecast to show expansion in the sector at 52.1. The pound has continued recent gains against the Euro as fear grow that Greece or another weak country may default on its sovereign debt obligations forcing richer countries in the 16-nation state to ride to the rescue.
In the Telegraph former EU trade commissioner Lord Mandelson (a supporter of the Euro) said that the 29% devaluation of sterling against the Euro over the last two years has served as a shock-absorber for the economy, praising the BoE money printing policy. He also mentioned how a weak pound has aided the UK in the recession, an option unavailable to countries using the Euro. However this support, although highlighting positives for the UK economy longer term also highlights the benefits of having a weak pound amongst this period of low economic activity.
Some economists and market participants are forecasting for the pound to reach parity with the Euro between now and the general election. The impact of the financial crisis, political uncertainty, an overextended housing sector and the government deficit are all factors likely to create further vulnerability for sterling and volatility in the exchange rate. Ashraf Laidi at CMC Markets says “liquidity withdrawal may become the buzz phrase of 2010 and the UK economy and its currency could fall victim to an excessive reduction in stimulus” pointing to concerns over economic activity once the UK government stops printing money. If you have a concrete requirement, the focus should be on fixing a rate and cost in sterling rather than trying to predict the exchange rate., especially for those wishing to avoid risk. Happy New Year!
US Dollar:
The Dollar was up against Sterling and the Euro this morning after recent positive U.S data prompted Fed Chairman Ben Bernanke to confirm the economy is now recovering from recession, suggesting interest rate rises are not far away. Investors took the cue to buy dollar-denominated assets, boosting greenback against the other majors this morning. In a note to clients, Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi UFJ in London said “The dollar rally which has taken place in December is significant in that it has brought an end to the powerful downtrend which had been in place since March following the Fed’s decision to begin quantitative easing”.
There is a good chance the Dollar will continue to strengthen this week due to higher yields on U.S treasury, and certainly if U.S non-farm payroll data due on Friday comes out better than expected. As well as the all important jobs data on Friday, there is a raft of other data released this week that could move USD, including the ADP employment report and Federal Open Market Committee minutes on Wednesday. GBP/USD 1.6161, EUR/USD 1.4365.
Euro:
The Euro was down against the Dollar and Sterling this morning as GBP held onto recent gains and the Dollar continued strengthening with positive U.S data raising expectations of the first interest rate increase to come from the U.S rather than Europe. If U.S jobs data is positive at the end of the week, the Euro could continue to slide against the Dollar, whilst questioned stability of countries in the Euro zone has put pressure on the Euro against Sterling also. Fears are growing in Europe that Greece or another country may default on its sovereign debt obligations, forcing the richer countries in Europe to come to the rescue or risk having one or more of its most vulnerable members leave the 16-nation Euro zone. Many economists believe this is unlikely, but the fiscal credibility of at least half the countries that use the Euro is still in need of restoration. Service and Manufacturing PMIs and retail sales data due this week should give an indication of the level of inflation in the Euro zone. GBP/EUR 1.1266, EUR/USD 1.4365.
Quote of the Day
Another fresh new year is here . . .Another year to live! To banish worry, doubt, and fear, To love and laugh and give! Anon
