Wednesday 11th January 2011
Good morning. Another calmer day, with the market finishing up pretty much where we started at the beginning of the trading day. Initially sterling slipped against the Euro, falling below the €1.21 level as investors trimmed bets to sell the single currency across the board, but the pound hovered near a 16-month high hit the previous day as sentiment towards the euro remained negative. Below you can see how rates for GBP/EUR and GBP/USD moved through the day yesterday:
~Currency Movements on Monday 9th January~
Pound remains near 16 month high vs Euro
As the charts above show, the GBP/EUR rate slipped throughout the day before recovering later. This was reported to be due to Euro demand from a UK clearer ahead of one of the Bank of England's afternoon fixings had pushed the single currency to the day's high. Demand strengthens a currency, and makes it more expensive, resulting in the drop.
Later in the day however, the Euro weakened again, pushing rates back towards the 16 month high recently seen. This is because if European officials are seen taking their time on solving the debt crisis, which could push more weak countries towards bailouts or even debt defaults. This is what is keeping rates supported at the moment, despite gloomy UK economic figures causing weakness for Sterling.
The most important release of the week will be the Bank of England rate decision on Thursday. We expect them to again hold rates at 0.5% and not to pursue any further Quantitative Easing, however there is an outside chance they could do so. I certainly expect more stimulus within the next few months if the economy continues to struggle, and this could weaken the Pound pushing exchange rates back down again.
While the EU debt crisis remains unresolved, and the UK retains its AAA credit rating however, it's likely GBP/EUR rates will remain supported.
UK Data disappoints
Other data released yesterday showed house prices fell at a marginally slower pace in the last quarter, but were expected to fall further. Retail Sales figures were also up for December, but the figures were being compared to last year, when you needed a snow shovel and ski-gear in order to get to the shops, so markets took the spike with a pinch of salt (unavailable at the time of the snow ironically!)
Sterling slips near dollar; USD strength could weaken Pound more
The pound was up a little against the US Dollar, but remained just below the $1.55 levels. Analysts see a risk of sterling weakness if the safe haven USD continues to get stronger and appreciates as the euro debt situation worsens. This could spell more weakness for sterling given that it has been closely tracking moves in the single currency against the greenback.
Today's Data
Today we will see UK Trade Balance figures, which often affect Sterling, especially if the numbers show a deficit. Germany releases GDP growth figures. In the USA there are Mortgage Applications and the Fed’s Beige Book, which is a report on the current economic conditions in the USA.
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