Mervyn King provides short-term respite for the pound, claiming it has reached fair value

Tom Tong15/Mar/2013Currency Updates

USD

Yesterday saw the dollars positive momentum against its major counterparts stemmed, as the greenback lost ground against the euro, yen, AUD & sterling. The ICE dollar index which tracks the dollar against a basket of six other currencies fell by 0.4%, this despite an earlier rise due to bullish figures released regarding the state of the US labour market. Jobless claims fell to the lowest level since January, well short of the (350,000) forecast, yet concerns that the recent dollar strength will encourage the Fed to scale back its current stimulus measures, and that the dollar was beginning to keel under the pressure of yet another good night for stocks, could well be attributed to yesterdays blip in what has been an impressive run of form. Analysts however remain highly optimistic, commenting this pause in dollar gains is just that, and we should expect the dollar to continue to gain ground and outperform its rivals. The year thus far has made it glaringly apparent that the US is liberating itself from the mire of repression far more effectively than other developed economies, reflected both in the currency and US equity. Yesterday saw the S & P 500, widely regarded as the best gauge of investor confidence out of the three US stock indexes, close to within two points of its record level achieved in 2007, whilst the Nasdaq and Dow also continued their impressive gains.
CPI Index released today, consensus is that this will be positive.

EUR

Despite their being a lack of economic data released from the Eurozone yesterday, we saw the common currency fall to a 3 month low against the dollar, before rallying slightly following the EU summit that began in Brussels. Leaders of the EU member states met in an attempt to boost growth throughout the continent, and the focal point of the discussions is likely to be the need to ensure growth in countries which are being blighted by ongoing austerity measures. France, Spain, Portugal, and Netherlands are all falling short of their deficit targets set by Brussels, and with youth unemployment now at over 50% in Greece and Spain, these countries will argue that there is clearly a need for economic stimulus throughout the eurozone. Germany however ignored these calls, and yesterday the eurozone’s biggest economy announced plans to curb spending by a further 5bn euros, deeming this as a strong signal for Europe, and their economy to be the ‘envy of the world’. The timing of these comments is bound to cause contention with other members of the eurozone, who are hoping for a relaxation of the tough budget.
Eurozone CPI released today

GBP

Sterling was able to gain back some of its recent losses in yesterdays session following comments from Mervyn King that recovery was in sight for the UK economy. He commented that the currency had declined far enough, and was now properly valued against its counterparts.
Speculation dominated Thursday’s session as rumors reported that Qatar is to invest a reported £10bn in to infrastructure projects, boosting demand for sterling as it rose the most in seven months against the greenback. The Qataris previous investments include the Shard, Heathrow Airport and Harrods.
We also saw sterling appreciate against all but two of its major 16 peers; which contradict the short positions we have seen hedge funds take a view on. Despite the positive gains of the sterling yesterday; the UK economy still remains in an overall downward channel and we expect George Osborne to confirm this next week (20th March) expected to forecast a contracting economy.
UK inflation expectations rose their highest point in 4.5 years on the back of speculation that the government will allow the central bank to place less emphasis on maintaining price stability – an on-going debate we expect to resurface until Mark Carney takes his position.
Stagflation will dominate the day as the economic phenomenon of inflation spiking as growth stays flat, forcing the fear that it will be locked in in the long term. The BoE have expressed a belief that inflation should not come down until the economy picks up, thus fueling the fire that it will be with us for the long term.
10 Year break even rate climbed as high as 3.37% the highest since 2008.
Economic announcements include UK Balance of trade and current account.

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Written by Tom Tong

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