Sterling retraces some of recent losses after last week's dramatic fall, as Draghi reiterates ultra-low interest rates

Tom Tong09/Jul/2013Currency Updates

GBP

Sterling is experiencing a downward pressure prompted by last Thursday dismal ‘forward guidance’ statement from the BOE. Nevertheless the UK economy is set to experience further resilience and growth which should help sterling surpass this current weakness. However, there is still some sentiment that, new Bank of England governor, Mark Carney will insist on triggering more support from monetary policy.

We had the latest UK Business Optimism Index, from accountants consultancy firm BDO, released yesterday which showed that it was at its highest level for over a year, the reading rose to 94.9 from 94.4 (reading above 95 indicates growth), although once again this only slightly helped sterling regain its footing against the greenback. Yesterday also showed RICS House Price Balance gauge rise in June, the highest level since Jan 2010. A positive number means more respondents saw values in property increase rather than decrease.

Amid investor speculation that Britons economic recovery will help support equity markets UK stocks advanced to a one month high. The FTSE 100 advanced to its second – largest weekly increase this year today as ECB and BoE are planning to keep their interest rates low for the time being.

Today the UK’s Manufacturing Production m/m is set to rise to 0.3 % from its previous 0.2%. GBP Trade Balance and Industrial Production m/m should have a minimal effect.

USD

The dollar held onto the majority of the gains it experienced on Friday following positive Non – Farm Payrolls figure for June. Even though there was positive sentiment during yesterday’s European Equity session, it had still failed to greatly puncture the greenback, which could symbolise that as the political situation in Egypt is deteriorating this favours the world’s premier safe haven currency. However, the dollar is in rally mode at the moment as traders lock in profits on the back of strong US economic data last week.

The Federal Reserve said yesterday that US consumers increased their debt $19.6 billion in May, up from $10.9 billion in April. This shows that with the recovery strengthening people are feeling more confident and are willing to spend more than they were able to a couple months back. This also shows that Americans are in a position to capitalize on lower interest and as long as there is faster job and income growth this momentum should sustain consumer spending.

Following Friday’s jobs report, the US stock market opened the week with on a positive note as investors remained bullish, this should support spending growth going forward as higher stock prices provide the resources to increase spending.

Today should be a relatively quiet day for the USD in terms of economic data, with only the NFIB Small Business Index releasing data.

EUR

The European Central Bank yesterday reiterated that it will keep interest rates low for the foreseeable future along with the fact that monetary policy would remain accommodative for as long as necessary. Following on from Mario Draghi’s speech yesterday he sees a gradual recovery in the Eurozone in the second part of 2013, even as risks in the economic market still remain.

Investors greatly concentrated on rumours that Greece is set to be granted its largest tranche of bailout funding; this deal could spare Greece defaulting on debt that is due in August and to do this it must continue its promise to cut further public sector jobs and other modifications in its spending to collect the funds it requires. There is potential that this may retrigger the Eurozone debt crisis as Greece’s split government is undecided how to meet the demands of the bailout.

There was slightly poor data out of Germany yesterday which threatened the single currency. German Industrial Production fell by 1.0%. The Federal Statistical Office in Germany also reported that German exports decreased by 4.8% and imports by 2.6%, possibly indicating that Europe’s largest economy is struggling to regain momentum. However, European stocks rose yesterday after coming back from their biggest decline in almost two weeks. This could be possibly due to the speculation that economic data should improve as Portugal’s government yesterday decided to keep hold of the coalition government. The Stoxx Europe 600 rose 1.2% at the close of the session.

Today Europe will hold its all day ECOFIN meetings in Brussels, with could create volatility depending on initiatives and decisions, but apart from that data will be scarce.

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Written by Tom Tong

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