Market looks for outcome at G20

Tom Tong19/Oct/2011Currency Updates

GBP

Mervin King, last night at a conference in Liverpool, stated that the British recovery is now “off track” and that this was due to problems in the Eurozone area and a slowdown in growth in the world economy, justifying his decision to increase QE further as weaker than expected growth forecasts and figures have been posted recently.

With consumer prices rising 0.6% last month and year on year inflation figures of 5.2%, Sterling was under considerable pressure yesterday. With raised concerns about stagflation in the near term, the pound fell against the dollar as traders and investors shed their positions against the pound. The Bank of England minutes released today will show whether further QE is expected together with the possible interest rate hike expectations, although possibility of this in the near future has somewhat diminished. With all the uncertainty in the markets at present and risk appetite diminishing rapidly, Sterling is expected to remain under pressure against the dollar and other safe haven currencies.

EUR

The euro lost ground against a basket of currencies yesterday as Spain saw yet another downgrade from Moody’s by another 2 notches.

France also warned yesterday that the future of the Eurozone could be under serious threat if no outcome is reached at the summit this weekend, stating that “An unprecedented financial crisis will lead us to make important, very important decisions over the next few days.” This is sharply in contradiction to the German finance minister’s statement on Monday that he expected no significant outcome after this weekend’s meetings. France’s status is also now under threat as Moody’s issued a warning about its credit rating.

At present it seems fundamental data fails to move the euro market as shown yesterday with the German ZEW report. Risk appetite and the on-going euro saga taking the forefront.

USD

The dollar saw a brief respite in its recent strength yesterday as producer prices rose more than expected and showed the biggest increase in the last 5 months. This move was relatively short lived as all risk sensitive assets showed huge volatility, yet failed to show distinct, clear direction.

With the speculation and impact of an increase in the EFSF fund, markets turned quickly on this information and showed a sharp decrease in demand for the dollar and other safe havens as risk appetite appeared to return to the markets. It appears that the market is looking for resolve in the Eurozone area and until this transpires we will see the dollar remain its strong position.

Unfortunately this outcome and pick up in sentiment is likely to be non-forthcoming in the near term and despite the structural problems apparent in the US, many analysts expect the dollar to remain the currency of choice given the safe haven appeal.

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Written by Tom Tong

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