Cliffhanger for a week for Sterling

July 13, 2009 - Posted By (Admin) in (default)

A cliffhanger of a week for sterling last week dominated by the expectation and then the announcement from the Bank Of England on interest rates on Thursday.  Going back to the start of the week
risk aversion was ratcheted up a couple of notches due to a few contributing factors; firstly the hangover of the payroll data from the US on the previous Thursday was still apparent and undermined any move into risky assets. In addition the civil unrest in China did not help- here violence in the western region of Xinjiang left at least 140 people dead and more than 800 people injured also helping the case for risk aversion.  This led to sterling weakness which was further heightened by the prospect of increasing the Quantitative Easing programme being priced into sterling.  As is common on interest rate decisions and announcements, the speculation beforehand will move the value of the currency before the actual announcement.   Sterling danced above the lows of the range against the USD and the euro…with 1.15 on the euro a crucial level to hold.
The riots in Urumqi led to the Chinese President, Hu Jintao returning home and missing the G8 conference. This avoided the possibility of discussing a change in reserve currency from the USD and therefore we had no surprises for the FX markets.  The movements in the markets were dominated by a move out of oil and commodities and risky assets into safe haven harbours such as the USD and the YEN due to investor caution.

Fast forward to Thursday and the Bank of England left rates unchanged at 0.5% but surprised the markets by keeping the Quantitative Easing programme at £125 billion- a big shock to the markets. For sterling we saw a knee jerk reaction to the news- moving higher against the USD and the euro. This puts sterling back into its comfort zone against the USD and euro and we should hold the 1.15-1.185 against the euro and 1.62-1.66 range on the US dollar in the short term. The move in sterling was not wholly significant due to the door being left open for a review on QE in the August BoE meeting; in addition recent weak economic data for the UK in the form of Industrial output and GDP is still weighing on the pound.

One aspect that could help the pound to increase against the euro is renewed worries over Eastern Europe; reports are that the IMF are discussing aid programmes with at least 10 Eastern European governments. Also the German finance minister also stated that Germany’s regional state banks are the “biggest systemic risk” to the nations’ financial sector. We have touched upon these concerns previously and so far the euro has been relatively unscathed, but this cannot last forever and heighten concerns and added stimulus in this area should weigh heavily on the euro going forward.

Have a great week…
 
Kind Regards,
 
Keith Spitalnick
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