US economy continues to out perform Europe as stock markets rally

Tom Tong04/Jan/2012Currency Updates

GBP

Sterling hovered close to a one-year high against the euro yesterday as well as gaining against the dollar. This comes as improved risk sentiment prompted some investors to close bets on more losses for the pound ahead of data on UK manufacturing. Further reason for the appreciation against the dollar comes as better than expected global economic data supported riskier currencies. Figures also showed British manufacturing appeared to be stabilising as orders from Germany and China picked up, with the purchasing managers’ index rising to 49.6 last month from 47.7 in November, beating expectations for 47.4. The pound’s gains mainly tracked a broad rise in riskier currencies and assets after better Chinese manufacturing and services
data and a sharper-than-expected drop in German unemployment. Nonetheless, many market players remain sceptical that the UK currency can be considered a safe haven, given a fragile economy and debt levels that are still high despite the government’s measures to cut the fiscal deficit.

EUR

Sterling Euro continued to trade a tight range yesterday as Eurozone banks continue to live hand to mouth. Fresh figures revealed yesterday highlighted the depth at which banks are plunging into the overnight emergency funding facility provided by the ECB. The emergency funding is still in high demand despite European banks taking out over 489 billion in three year paper only two weeks ago. This insatiable appetite suggests many anonymous European banks are far from secure and must be experiencing continued financial difficulties.

The Greek saga continued yesterday with senior figures admitting they may have to exit the euro by March if it cannot agree on the terms of the latest bailout package. This honesty has been seen as a last ditch attempt to put pressure on private speculative investors. A further dent was dealt to Spain as well as the ratings agency Fitch cut growth forecast for the country against a backdrop of a fifth consecutive month of unemployment rises.

USD

Reports this week show manufacturing in the US and China improved in December, suggesting production elsewhere is weathering the European debt crisis. Furthermore, the market has taken into account a report tomorrow from the Institute of Supply Management (ISM) which will probably show service industries expanded in December at the fastest pace in 3 months. This strong US data has lead to risk appetite elsewhere with a notable example being the AUD which has risen since trading began in 2012. Furthermore, the Federal Reserve will from this month onwards, publish quarterly projections of future interest rates in an attempt to stimulate the economy further. All eyes will be on Fridays non farm payroll which could highlight further this strong US recovery.

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Written by Tom Tong

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