Sterling rises versus euro and dollar; markets await key news from busy week ahead

Tom Tong01/Nov/2010Currency Updates

Another uneventful week in financial markets, as investors wait and square up positions for next week’s deluge of critical news. Foremost among these, of course, will be the announcement of a new round of large scale asset purchases by the Federal Reserve on Wednesday. In the meantime, the dollar traded without much conviction to end the week essentially flat on a trade-weighted basis, as did equities and commodities.

GBP

Macroeconomic news took back centre stage in the UK last week. Third-quarter GDP numbers came in much stronger than expected, +3.2% saar or double market consensus – another upside surprise in construction and services account for the upside. GBP lost no time rallying off this bullish news, and the rally against both the euro and the USD continued into Friday afternoon. GBP closed the week up 2.4% against the greenback and 2.3% against the common currency – the best sterling performance in quite some time

USD

Macroeconomic news was, once again, mixed last week, as durable goods orders came in strong thanks to a surge in volatile aircraft orders, while the guts of the report showed disappointing weakness as regards future capital spending. Third-quarter GDP was also mixed, as domestic demand held up relatively well while the trade performance of the US economy surprised to the downside. None of this mattered much to investors, who remain focused on the barrage of information expected next week: on Tuesday, the results of the midterm congressional elections, which are expected to deliver a spectacular setback to the Democrats; the expected announcement of the how, when and how much of QEII at the Fed meeting Wednesday and the critical payroll report for October on Friday. The dollar spent the week trading generally stronger against other major currencies, until a late Friday sell off reverse the gains and delivered a loss of 0.23% in trade weighted terms for the week.

EUR

Not a great week for European fundamentals. Peripheral bonds suffered, as a slate of negative news hit the tape. Ireland is making no progress in its efforts to force junior bank debt holders to share the cost of the bailout. Greece is missing its tax revenue targets as the economy shrinks under the weight of savage budget cuts. Spanish unemployment rose again in September to a spectacular 20.8% of the labour force. Irish 10-year yields closed at a new crisis high, flirting with the 7% level, while all other peripheral bonds widened significantly relative to bunds. There were some signs of weakness in core Europe as well, as German retail sales in September plunged 2.3% MoM and severely disappointed investors. Forex markets were oblivious to all this, as focus remains on the barrage of news and data coming out of the US in the coming week, and the euro closed nearly unchanged for the week against the US dollar.

Next Week

US news will be the focus next week. In addition to the midterm elections on Tuesday, we have the all-important FOMC meeting on Wednesday and the payroll report on Friday. Also important will be Eurozone PMIs and a slate of Central bank meetings: Bank of England, Reserve Bank of Australia and the Bank of Japan.

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Written by Tom Tong

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