Pound remains poor in run up to BoE decision

Sterling was pressured against the dollar and euro yesterday as speculation of further easing by the Bank of England later this week overshadowed the market. The UK currency failed to capitalise on a mild boost in risk sentiment from a rise in global equities and as G20 finance ministers pledged over the weekend to keep stimulus policies in place until recovery took hold.

This means markets now wait to see what the BoE will do this Thursday. Rates at 08:45am 08/09/09 are as follows:

  • GBP/EUR 1.1391
  • GBP/USD 1.6432
  • GBP/AUD 1.9072
  • GBP/NZD 2.3579
  • GBP/CAD 1.7607
  • GBP/CHF 1.7320
  • GBP/ZAR 12.379
  • GBP/JPY 151.92

Pound to Euro
Eurozone economic activity rose in August for the first time in 15 months, The latest Purchasing Managers’ Index (PMI) figure rose to 50.4, raising hopes that the Eurozone could soon emerge from recession.

Any score above 50 shows an increase in economic activity. This is the first time the index has been above this benchmark score since May 2008. in addition the ECB kept its key interest rate unchanged as expected at a record low of 1 percent. The head of the bank said there was an expectation that “severe contraction” would now be followed by a period of ” stabilisation and gradual recovery”. So, the Euro strengthened, which is likely to be the case going forwards, due to fears of more QE from the BoE.

Sterling hit a one week high against the euro on Thursday on news the UK services sector grew at its fastest pace in almost two years, easing concerns about the UK economy. Still, the backdrop for sterling remains negative on the growing view the Bank of England will keep interest rates low for some time.

With it being Labor Day in the US on Monday we expect a quiet start to the week. Focus in the UK will be on the Bank of England Interest Rate Decision due Thursday 10th September. The base rate is expected to remain on hold at 0.5% but it is possibility of the BOE increasing quantitative easing further that will keep investors on their toes.

It is important to keep things in perspective though. While we can find the fuel for a GBP rally the fundamental health of the economy will act as a constant drag. Economic data due over the coming week could add fundamental weight to the GBP.

Europe this week starts with Tuesday’s German Trade Balance, Current Balance and Industrial Production. Recent releases have indicated that the German economy is very slowly turning around however these figures should provide an indication as to the pace of this so called recovery. Wednesdays German CPI and Thursday’s French Manufacturing Production, Italian Trade Balance and GDP all have the ability to move the EURO.

Pound to US Dollar
Sterling rose for the fourth consecutive day against the Dollar during early trading on Monday morning, repairing the losses seen early last week. The lower than expected PMI (Purchasing Managers Index) Manufacturing figures last Tuesday, showing weak demand in the UK manufacturing sector, were the cause of the sell-off with the pound hitting lows of just above the $1.61 level.

Nevertheless, Thursday’s release of strong PMI Services numbers helped cause the rally towards the end of the week, with the figures coming out at 54.1, higher than the expected 53.9. Traders paid particular attention to these figures due to the fact that the service sector accounts for a larger proportion of the UK economy than manufacturing.

The US non-farm payroll data on Friday showed a contraction in the US job markets in August, but was less than forecast, boosting confidence that the global economy is pulling out of recession. However, the unemployment rate still rose more than expected to a 26 year high of 9.7% meaning this confidence is fragile. Overall, this data and the general environment of improving risk appetite assisted Sterling’s rise versus the Dollar, which is seen as a safe haven.

These gains were extended on Monday morning with the pound reaching $1.6425, the highest level in almost two weeks. This was caused by the British Chambers of Commerce raising its forecast for U.K. economic growth for 2010 to 1.1 percent, up from June’s forecast of 0.6 percent.

However, some traders were still tentative of the pound’s strength, with recommendations to lock in these gains against the Dollar at the current level. This was due to the Bank of England previously announcing it is expanding its asset-purchase program by 50 billion pounds to 175 billion pounds, meaning Sterling could fall as the Bank will be selling the pound to buy other assets, putting downward pressure on the UK currency.

Therefore, it would perhaps be advised for buyers of US Dollars to consider using a Stop-loss order to minimise any losses resulting from the pound falling again in coming weeks. Alternatively, fix the rate immediately by securing a spot or forward contract, protecting your payment against any market pitfalls.

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