Pound:
The second day of a New Year and I am rather fearfully reporting (I don’t like delivering bad news!) that sterling has lost once again it’s recent gains against the Euro and USD in addition to a basket of other currencies. The point made previously over political uncertainty leading up to the general election in the summer is already starting to trickle through. It appears that Gordon Brown and Alistair Darling have different views with regard to our massive government deficit. Darling confirmed yesterday than forecast growth figure in 2010 will be used to reduce our debt (the deficit) in contrast to PM Brown is happy to allow this growth to keep public spending going. This unfortunately does not provide investors with any confidence in our country, forcing the pound to weaken yesterday afternoon on the back of Darling’s comments, highlighting not only concerns with who will be running the country but problems internally within the Labour government. This political news took the shine off strong manufacturing data seen yesterday preventing any rally for sterling despite the sector showing further expansion at 54.1 against 52.1 forecast.
The construction industry however, perhaps unsurprisingly remains in contraction with the latest figure below 50 and expectation at 47.1. We still have a lot more economic data to get through this week with consumer confidence, Halifax house price index and service sector all due tomorrow before the Bank of England make their QE and interest rate announcement on Thursday, hold tight!
US Dollar:
The Dollar was up against Sterling but down against the Euro this morning, whilst trading in tight ranges before the all important U.S nonfarm payroll data out Friday. A 0.016 percentage point drop in the 10 year U.S Treasury yield overnight to 3.827% led to Dollar selling in Asia, as investors speculate the Fed Reserve won’t increase its key policy rate for the time being, despite positive U.S data. There are fears the market may have priced in Fed rate hikes to the stronger Dollar, as Fed rhetoric also remains cautious on the matter. Even as the U.S economic recovery gains momentum, Fed Governor Elizabeth Duke suggested the central bank will keep its interest rate low for some months, also anticipating that the subdued trend in inflation will continue.
The reluctance of the Fed to increase yields as fast as the U.S economy is recovering knocked USD against the Euro this morning slightly, although Sterling fell even further due to Alistair Darlings comments (taking the cautious approach suggesting any growth figures will be used to reduce debt), helping USD gain ground. Movement will probably be in tight ranges this week as investors wait on the payroll data on Friday before making any big moves. GBP/USD 1.6065, EUR/USD 1.4429.
Euro:
The Euro was up against Sterling with factors in the U.K probably contributing, as the single currency was down against USD and other currencies. Lingering concerns over European credit are making investors increasingly unwilling to actively buy the Euro, although it could be helped today by falling German Unemployment Change, due today. It has fallen in past months, beating expectations of economists and boosting the Euro and more could be expected today. Consumer Price Index Data also released in the Euro zone today may have an impact as traders wait to see how the Euro zone economy is performing against others.
As the currency market seems to be moving more by yield differentials than risk appetite, the Euro is currently on the back foot against USD and other majors, and will probably be in similar ranges up until the U.S jobs data at the end of the week. GBP/EUR down to 1.1138, EUR/USD 1.4429.
Quote of the Day
“Not everything that is faced can be changed. But nothing can be changed until it is faced.” – James Baldwin
