Pounds gains on US Data may not last.

Good Morning. The pound rose yesterday after strong US GDP Data showed that the US is now out of recession. This economic data bolstered the view of an improving global economy, spurring demand for currencies considered to be higher-risk such as the pound. Rates @ 08:30am 30th October 2009 stand as follows:

  • GBP/EUR 1.1152
  • GBP/USD 1.6528
  • GBP/AUD 1.8099
  • GBP/NZD 2.2659
  • GBP/CAD 1.7644
  • GBP/CHF 1.6843
  • GBP/JPY 150.33
  • GBP/ZAR 12.811
  • EUR/USD 1.4813

Sterling strength, but why?
There was actually negative data for the UK yesterday. Data showing weak growth in UK money supply was pretty much overlooked, and also the figures kept speculation intact that the Bank of England may expand its programme of buying UK assets to help stimulate the economy.

In other negative data, comments from a BoE policymaker that a weak domestic currency had helped UK exporters also attracted little notice from the currency markets. BoE board member Paul Fisher on Thursday was quoted as saying that a lower sterling rate had given exporters an advantage, and that they have seen some pick-up in the market.

Despite this poor economic outlook, the US GDP figures overshadowed this, and caused the pound to rise.

US GDP
The US economy grew at an annual pace of 3.5% between July and September, its first expansion in more than a year. The growth was helped by a substantial government spending plan, including a scrappage scheme to boost car sales. The official figures indicate recession has ended, but some economists think there could be further setbacks.

President Obama said while it was welcome news, the US was still a long way from recovering from the deepest downturn since the Great Depression. While economists may be celebrating, it is too soon for the rest of us. The recent weakness of the dollar won’t help Americans buy goods from the rest of the world and with the unemployment rate in the US currently at 9.8%, life is still very hard.

The reason this news has strengthened the pound is due to the safe haven status of the US Dollar. In times of economic turmoil as we have had recently, investors move funds to the percieved safe haven status of the USD. This strenghtens the currency, and others like the pound weaken as a result.

Now that the US is out of recession, this spurs those investors to return to higher risk currencies such as the pound.

Will rates keep rising?
These gains are very likely to be short lived, as the rise is really only due to risk sentiment rising. We have to look back at the other data and comments yesterday that paint a bleak picture of our own economy. The fact remains that we are the only major economy still in recession, and it’s very likely that the Bank of England will increase their Quantitative Easing programme next week. This will weaken the pound yet again, and could wipe out all the gains made in the last few weeks.

Therefore, don’t get caught out by these gains, and hope that this is a new trend. it’s very likely we will see the pound retract into next week as the poor state of our economy again takes center stage.

It is times like this that Stop Loss and Limit orders are very useful. You don’t want to lose out on the recent gains, so you can place a Stop Loss order to secure your currency should rates indeed fall back to recent lows, therefore protecting yourself against adverse movements.

If you have a requirement to purchase currency with Sterling, then contact us today to have a free consultation on the current market conditions, and take advantage of our commercial exchange rates that are significantly better than the high street banks will offer.

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