Concerns increase over Greece's ability to rein in its burgeoning budget deficit

Concerns increase over Greece’s ability to rein in its burgeoning budget deficit

January 14th, 2010 by Toby

Pound:

The pound as I’m sure your aware strengthened significantly yesterday against the majors after a mix of improved UK data and hawkish comments from a bank of England MPC member, Sentance. Hawkish refers to those favouring an increase in interest rates which may occur later this year in the UK. Industrial production data also helped lift the pound by fuelling expectations that the UK grew in the last quarter of 2009 seeing an end to the recession.

The official preliminary GDP data is due out on 26th January at 9.30am. There is no UK data due now until Monday when the consumer price index (CPI) is released. This figure came close to the 2% target at 1.9% in December with any figure higher likely to further support a need for an interest rate rise at some point this year. We may find for the remaining part of this week that sterling tails off a little against the Euro and USD as the market digests the latest positive news and begins focusing once again on concerns over the UK government, public deficit and the current AAA rating.

In separate news unfortunately I failed to score last night at five-aside-football although I did hit the crossbar a couple of times, but with a 7-6 loss, I can’t complain too much as I continue to burn off the Christmas excess!

US Dollar:
The Dollar was still down on Euro and Sterling as positive rhetoric on the state of the U.K economy continues to help GBP put pressure on USD. The Euro also held it back but in tight ranges as investors look to the European Central Bank’s rate decision and press statement later. Any indication of a more hawkish stance in the ECB’s economic outlook may work positively for the Euro.

The Dollar could receive a boost if U.S December retail sales (due at 1330 GMT) are positive and underscore further economic recovery. The Dollar could make ground back on Sterling quite easily if investors look to the U.K warily again on any pessimistic rhetoric on the economy or poorer data so was held in tight ranges, as was the case against Euro as concerns over Greece’s ability to rein in its burgeoning budget deficit kept the Dollar from any further losses against it.

A Fed Reserve survey showed a U.S economy slowly recovering, but still with enough problems to keep interest rates near zero. “The U.S. economy is chugging along, albeit at a slow pace, and that means the Federal Reserve has no real urgency to raise interest rates, leading investors away from the ultra low-yielding greenback into assets with better returns”, said Kathy Lien, director of currency research at GFT Forex in New York. EUR/USD down for the Dollar at 1.4523, GBP/USD Sterling still up at 1.6299.

Euro:
The Euro was up against the Dollar marginally and still down against Sterling as Euro zone difficulties and recent positive UK data and MPC comments on the state of the UK economy coincided to nudge Sterling ahead of the Euro. A strong Australian jobs report prompted institutional investors to buy riskier currencies like the Euro, helping it maintain its recent strength. The European Central Bank’s governing council meet later today, and the Euro could strengthen against the majors if a positive view is taken of a Euro zone economic recovery. It is by no means certain however, as debt concerns in Greece still burden the Euro. Prime Minister George Papandreou said Wednesday that Greece wouldn’t abandon the Euro or seek help from the International Monetary Fund, even as an IMF team of technical experts started a week-long mission to the country and investors continued to pressure the country’s stocks and bonds. “That’s causing the market to get a little bit nervous,” said Steve Butler, director of foreign exchange at Scotia Capital in Toronto.

The Euro also could be under some pressure, Lien said, as investors take profits and reposition their portfolios ahead of Thursday’s decision by the European Central Bank on key Euro zone interest rates, which aren’t expected to change. ECB officials could make mention of the situation in Greece, Lien said, which would pressure the Euro in Thursday’s trading. EUR/USD still in Euro’s favour at 1.4523, GBP/EUR, Sterling remaining strong at 1.1220.