Sterlng Euro & Sterling Dollar September 2009

Sterling Falls
Sterling fell to its lowest level against the euro in two and a half months on Tuesday, as a bout of weakness in global equities helped darken the pound’s near-term technical outlook. Today we’ll focus on Sterling rates to Euro, US Dollar, and Aussie Dollar. First we’ll have a quick look at how low rates have dropped:

  • GBPEUR 1.1463
  • GBPUSD 1.6364
  • GBPAUD 1.9558
  • GBPNZD 2.3876
  • GBPCAD 1.7635
  • GBPCHF 1.7378
  • GBPZAR 12.775
  • GBPJPY 154.03

Sterling fell away last week and again slipped further on Monday, hovering around its lowest level against the Euro in over a month. The fall was attributed predominantly to the comments that UK interest rates will stay low as the economy struggles, while strong Euro data boosted optimism about the pace of the Eurozone’s recovery.

The Pound slipped towards the 87 pence level against the single currency in the aftermath of strong European purchasing managers’ indices last week. Also last week, Bank of England policy meeting minutes showed that there had been a push to extend quantitative easing more than was ultimately decided.

Minutes from the BoE’s August policy meeting last week shocked markets as some policymakers, including Governor Mervyn King, had voted for an even bigger increase of 75 billion pounds to its quantitative easing programme. The surprise 6-3 vote, which decided on a 50 billion-pound boost, raised bets that British rates would stay at a record low of 0.5 percent until well into next year.

Analysts said Sterling would remain under broad selling pressure in the short term on the view that the BoE is delving deeper into quantitative easing while other central banks may be winding down measures to stimulate their economies.

Meanwhile the Euro advanced to its highest level in more than a month against Sterling following on from data showing that the Eurozone economy contracted only 0.1% during the second quarter, the latest survey data supported confidence that the economy could soon return to growth.

The German ZEW research institute’s economic sentiment survey surged to its highest level in more than three years. Furthermore the Purchasing Managers’ Indices confirmed that business activity in France and Germany rose in August, helping to provide some stability to Eurozone economic activity for the first time in fifteen months.

The US Dollar initially strengthened last week against Sterling, as weaker global stock markets and sentiment about the strength of global recovery encouraged safe-haven demand for the Dollar. However, Sterling was able to gain back some of these losses throughout the remainder of the week, despite a worse than expected budget deficit for the UK (The deficit now stands at a staggering £8 bln.)

The US data generally confirmed improving housing and manufacturing sectors, supporting weekend comments from Federal Reserve Chairman Bernanke that the economy is beginning to emerge from recession. Both the New York and Philadelphia Federal Reserves reported stronger than expected rises in manufacturing activity in their regions.

Furthermore, US mortgage applications rose and existing home sales surged 7.2% in July to 5.24 million units, the highest level in almost two years. Traditionally all this would have meant just one thing, the dollar should strengthen and the pound should weaken, however, as regular readers are aware, the current global climate is far from ‘traditional’.

The contrasting opinion, held by many analysts, is that as data from the U.S shows the recession reaching an end there will be an increase in the amount of investors pulling money away from the safe-haven of the U.S. economy and investing in more high-risk assets elsewhere. This could have the opposite effect and weaken the USD and even potentially strengthen the Pound as investment in the UK rises.

All things considered, the direction of Cable is currently the subject of much debate amongst investors as well as analysts and with a plethora of factors pulling the Dollar in different directions the outcome remains unclear.

The second estimate of US GDP on Thursday could weigh on the US Dollar if the economy contracted more than expected and is worth keeping a close eye if you have any future requirement for $’s. For all additional information on data which could affect your Dollar purchase please contact your FCG Account Manager.

The minutes of the Reserve Bank of Australia’s 4th August policy meeting revealed that the Central Bank remains wary of raising interest rates too early whilst confidence remains fragile. This led markets to pare back some expectations of an interest rate rise in the near-term and undermined the Australian Dollar slightly.

However, the higher interest rate Australian Dollar was buoyed by rising risk appetite over the latter part of the week. The economic outlook also continued to improve, notably with a $50bn contract to sell liquefied natural gas to China.

The GBP/AUD rate closed at 1.969, down 0.8% from 1.985 a week earlier, benefiting those converting Australian Dollars into Sterling.

This week is relatively quiet for domestic releases. However, construction work data (Wednesday) and business investment data (Thursday) could boost the Australian Dollar if they raise expectations that next week’s economic growth report could be better than previously expected.

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