US stocks recover, euro rallies, markets await UK inflation report

Tom Tong10/Aug/2011Currency Updates

GBP

Despite social unrest in the UK, declining economic fundamentals remain the main driver behind sterling weakness. Data from the UK disappointed, with British manufacturing output falling 0.4% in June representing a sharp decline from May whilst the UK trade balance showed an 8.9 billion deficit, higher than the expected 8.2 billion GBP deficit.

Today Governor Mervin King will publish his inflation report. This will provide further information regarding the UK’s poor growth prospects and high inflation. Should the report detail the need for further action in the form of quantitative easing then sterling will come under increased selling pressure

EUR

The euro has rallied due to the ECB buying Spanish and Italian government debts for a third consecutive day. This was helped by the main indices picking up slightly (the DAX is up 2.14% and CAC up 0.9%).

The Bank of Ireland has reported a 723m euro loss, casting further doubt on the currency. French industrial production is also down by 1.6% compared to the forecasted loss of 0.1%. There is still a looming threat of a downgrade to France’s AAA rating.

USD

Following the recent downgrade of US Government debt by ratings agency Standard & Poors, last night the, US Federal Reserve pledged to keep US interest rates at ‘exceptionally low levels’ until mid-2013 at the earliest in order to stimulate US economic recovery. The impact of their quantitative easing programs has so far been limited at best. As QE dilutes the currency which is negative for the dollar, however, QE’s positive impact on risk assets should outweigh concerns over further expansion of monetary policy.

Yesterday also saw the US stock markets reverse with the DJI and S&P500 recovering 3.98% and 4.74%, respectively.

This afternoon see the release of US wholesale and crude oil inventories and the release of the Federal budget balance this evening.

Elsewhere

The rapid appreciation of the Swiss franc continued yesterday after the Federal Reserve announced that it plans to keep its loose monetary policy going until 2013. The safe haven status of the Swiss franc amid loss of confidence in the euro and dollar among investors is causing concern among Swiss policymakers, who last week cut interest rates and injected the money markets with fresh liquidity to try and stem what they regard as overvaluation of the currency and so protect domestic growth.

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Written by Tom Tong

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