Sterling suffers with riskier assets; talk of QE intensifies

Tom Tong05/Oct/2011Currency Updates

GBP

With riskier assets under pressure of late due to global fears of further recession, Sterling has been on the trading down in recent sessions, nearly hitting lows seen in September. The pressure is likely to continue due to fears of more QE by the Bank of England and weak PMI manufacturing data posted on Monday which showed the sector is not in contraction, contrary to expectation, yet still ever closer to the sub 50 level.

A break below September’s low is likely to see more downward pressure on Sterling; this would be further compounded by more negative data from the UK. George Osborne stated Monday that he would support any move by the Bank of England to increase QE but many analysts believe that November is a more likely date, however, weak data posted today would fuel the argument for an early decision. This could easily be posted today as we see revised Q2 GDP, PMI service sector and total business investment.

EUR

After a brief rally seen in the late US session, the Euro gained some ground back from a week long sell off but unfortunately this sentiment lasted a relatively short period of time. Technically it is possible this deterioration in the single currency could stop imminently, but with the persistent geo political pressures in the region there is good argument that we could see the selloff continue until the market sees a definitive resolve in the Greek default crisis and also banking pressures in other countries. Such bad news was only compounded by Moody’s further downgrade of Italy from Aa2 to A2. With Goldman predicting a recession in the short term, followed by stagnation the next and S&P stating that western Europe is likely to slide back into contraction the analysts outlook still remains incredibly bearish.

With global growth dwindling and tensions remaining firm regarding the next Greek bailout which has been postponed until mid-November there is a high percentile chance that the safe-haven bidding seen in recent sessions is likely to continue and further pressure seen on the single currency and other so called riskier currencies.

Today’s release of PMI service sector data, Q2 GDP and retail sales figures out from the EU is likely to guide the markets on making the decision to continue the sell off or change momentum. Tomorrow’s interest rate decision from the ECB will again be scrutinised by the market as there has been serious speculation that we could easily see a reduction in the interest rate by a quarter percent, which would only add further pressure on the single currency.

USD

Ben Bernanke was speaking yesterday to the Joint Economic Committee in Washington and confirmed he would do all he can to aid the dwindling US economy and also expects co-operation from the White House and Congress. This statement keeps the door wide open for a third round of stimulus, already tagged as QE3. He noted that banking conditions have increased dramatically since the inception of the global crisis, however, consumer confidence still remains low and they are currently battling with a lower than expected rate of expansion. Bernanke also highlighted increasing pressure on Beijing to increase the value of the Renminbi stating the deliberate intervention to hold this value down is damaging the prospects of a global recovery. With the US Senate voting overwhelmingly to impose tariffs on imports from countries with undervalued currencies, typically China, there is now a distinct possibility, as stated by China in a reply statement, that we could therefore be on the brink of a so called “Trade-War”.

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Written by Tom Tong

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