Sterling falls to six week low versus the dollar as Euro contagion begins to trouble Germany

Tom Tong24/Nov/2011Currency Updates

GBP

The Pound fell to a six month low against the Greenback yesterday as it followed similar drops in riskier currencies and assets. However, sterling climbed against the euro due to poor demand at a German debt auction spooking investors. German Bund futures saw an especially poor auction raising concerns that the benchmark for value on all other paper was losing its own safe haven appeal.b The German debt auction followed a volley of bad fundamental data with Euro Zone industrial orders and Purchase Managers data also down, seriously increasing the prospect of recession in the block. Sterling suffered as worries spread about the worsening of the sovereign debt crisis in Europe painted a grim picture for the prospect of UK export to the bloc. Many market participants see room for the UK currency to gain against the euro, however. The euro fell 0.5 percent to 85.98 pence, pulling away from a three-week high of 86.65 pence hit on Tuesday. More falls would bring into target its 200-week moving average around 85.59 pence.

Yesterday saw the BOE minutes which revealed a 9-0 vote to keep its quantitative easing target at 275 billion pounds, though some felt more QE might be warranted in the future. Analysts said there was some relief that there were no votes to increase QE this month, though this was offset by warnings that the euro zone debt crisis was exacerbating bank funding problems.

In a speech on Tuesday, BoE Deputy Governor Paul Tucker said the BoE’s credibility would be tested, given it has implemented more QE on the assumption that inflation would fall sharply. He added it was important not to get too downbeat about the economy’s medium-term prospects.

EUR

The single currency hovered near seven-week lows against the dollar on Thursday, having suffered a steep sell off after a “disastrous” German bond sale fuelled fears the region’s debt crisis was beginning to threaten even Europe’s biggest economy. Although the euro bounced back slightly in Asia on short-covering, bringing other risk currencies higher with it, market players see the currency staying under pressure as tensions in the currency bloc showed no sign of stopping. While unattractively low yields played a big part, some market players fret that Germany may be losing its cherished safe-haven status on the spectre of the rising cost of bailouts as more euro-zone countries come under attack from the market. There is continued talk in the papers of the prospect of a single currency Euro bond to try and restore confidence in the bond market.

USD

With risk aversion fuelling demand for the safe haven currency, the dollar gained ground against its major counterparts. EUR/USD finally broke out of its range, falling nearly two cents to close, while USD/JPY climbed to finish above 77.00.

Reports out of the US yesterday told a mixed story, Durable goods orders gave the markets a nice upside surprise as both the headline and core figures exceeded expectations. Core durable goods rose 0.7% last month, beating forecasts which called for a 0.1% uptick. Meanwhile, the headline figure showed a 0.7% decline, which, when compared to the 1.1% slide that economists had forecasted, isn’t so bad!

Also, the core PCE price index, which, if you’ll recall, is the Fed’s price index of choice, printed as expected and showed a 0.1% rise in prices.

Unemployment claims missed its mark as it showed a total of 393,000 claims instead of just 389,000, a small decline of 4,000. Personal spending also failed to meet expectations, showing a 0.1% monthly increase rather than the widely anticipated 0.4%

No reports due today from the US as the US will be home celebrating Thanksgiving. Expect to see low liquidity and irregular volatility in the markets.

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Written by Tom Tong

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