Sterling remains under pressure due to risk of QE

Tom Tong22/Oct/2010Currency Updates

GBP

Sterling hit a 6-1/2 month low against the euro on Thursday as weak retail sales data added to concerns that evidence of a faltering UK economy could push Bank of England policymakers to increase monetary easing.

British retail sales unexpectedly fell for the second month in a row in September, hurt by weak clothing and fuel sales, underlining the view that the economic recovery has peaked. The data dented the pound, which has come under selling pressure since BoE minutes on Wednesday showed one policymaker, Adam Posen, calling for a resumption of stimulus through quantitative easing.

EUR

Yesterday, positive data from both Germany and China helped boost the currency throughout the day. The euro has made gains against most of its main currency rivals in recent weeks, specifically against the USD. The EUR/USD pair continues to trade at the recent highs.

Ahead of this weekend’s meeting of the G20, investors appear to be fairly certain that recent improvements in the global economy will continue to occur. Analysts are predicting that the euro will largely maintain, if not increase, its recent gains to close out the week. Traders will want to pay attention to today’s German IFO Business climate figure. As the largest economy in the euro-zone, German data tends to have a large impact on the marketplace. The IFO figure is a survey of businesses throughout Germany, and is considered to be a leading economic indicator. A figure above the forecasted level of 106.5 may boost the euro in afternoon trading.

USD

The USD seems unable to bounce back from the downward spiral it has been experiencing for the last several weeks. Investor concerns regarding the quantitative easing package likely to be unveiled by the Fed as early as next month, have led to steady losses for the greenback. In addition, disappointing employment and housing figures have caused confidence in the US economy to tumble. It appears that the new norm for the EUR/USD pair is to trade above the $1.4000 level, while the USD/JPY consistently hits fresh 15-year lows.

Despite yesterday’s better than expected unemployment figure, the greenback was unable to capitalize on the positive data. In addition, the Philly Fed Manufacturing data came in well below expectations. Barring any significant positive data from the US economy, the dollar is likely to remain at its current levels.

Today, a lack of significant news means that dollar values will be determined by indicators from Europe and Canada. Traders will want to pay attention to the German IFO Business Climate figure as well as the Canadian Core CPI, scheduled to be released at 8:00 and 11:00 GMT respectively. Positive results for either indicator will likely lead to a further drop in dollar values.

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Written by Tom Tong

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