Respite for exporters as sterling loses hold

Tom Tong21/Jan/2011Currency Updates

GBP

Sterling fell against the US dollar and the euro on Thursday after the greenback rallied on strong US housing numbers and some large real money accounts reallocated funds away from the pound to the single currency.

Also weighing on sterling was a mixed UK industrial trends survey that highlighted the dilemma facing Bank of England policymakers.

Sterling was down 0.8 percent against the dollar, off an eight-week high struck earlier this week. Against the euro, the pound fell 0.45, after returning to a 2 week high since being well supported following higher-than-forecast UK inflation data on Tuesday, causing investors to bring forward expectations for when the BoE will hike rates, with a 25 basis point rise fully priced in by around mid-year.

Yesterday’s movements may well inspire euro and dollar sellers to secure forward rates and hedge against an otherwise bullish outlook for sterling this coming year.

EUR

The euro has been rising since late last week, hitting a nearly two-month high Wednesday because investors have been expecting European leaders to take more aggressive steps to counter Europe’s debt crisis. Recent successful bond auctions in Spain and Portugal reassured investors that the region’s indebted governments could still raise money.

The euro rose to a two-month high against the US dollar on Friday, breaking past option barriers on steady buying by speculators and sovereign funds.

The single currency also rose to a five-week high versus the yen up 0.2 percent on the day.

Looking ahead to today, the most important economic indicator scheduled to be released from Europe is the German Ifo Business Climate at 09:00 GMT. Traders will be paying close attention to today’s announcement as a stronger than expected result may boost the EUR in the short-term. Traders should pay close attention to the market as there is an opportunity for traders to capitalize on the fluctuations which are likely to follow this release.

USD

The US dollar rose against sterling on Thursday as better-than-expected housing and employment data suggested that the US economy was improving, but headed towards eight week lows against the euro amidst hopes that Europe was getting a handle on its debt crisis, limiting euro selling. By yesterday’s close, the USD also showed gains against JPY

High unemployment and a lacklustre housing market are the biggest obstacles to the US economy’s recovery, but stronger-than-expected data on jobless claims and existing home sales provided a glimmer of hope.

US Federal Reserve monetary policy largely relies on labour market conditions and the pace of the economic recovery, so signs of improvement increase expectations of higher interest rates, which makes the dollar more appealing to investors.

The Dollar Index, which tracks the greenback against the currencies of six major US trading partners including the euro, yen and pound, fell 0.2 percent to 78.666.

As for today, the United States is not due to release much data of concern. Canada, on the other hand, is going to release vital data regarding its retail sales levels, which last week caused a stir among the USD and EUR. Growth in Canadian sales may help return the Loonie back to a more bullish posture, but forecasts appear modest at best.

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Written by Tom Tong

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