Janet Yellen confirmed as new chair of the Fed as British house prices soar

Tom Tong09/Oct/2013Currency Updates

GBP

Sterling initially rose against a weaker dollar as the carousel of positive data out of the U.K continued. Uncle Sam is still in a miserable state and the U.S fiscal debate continues to drag it’s heels leaving the dollar trailing behind most currencies. However overnight trading saw the Dollar gain strength against the pound stemming from reports out of the U.S stating increasing dialogue between Republicans and Democrats. The IMF increased their forecasts for U.K growth. Having forecast GDP growth of just 0.7% this year and 1.5% next year, the IMF has scrapped these predictions and now anticipates growth of 1.4% for this year and 1.9% for 2014.

Unspectacular trading against the Euro saw Sterling slightly down. However the Euro has strayed from the 1 month highs seen last week.

It still remains true that a Englishman’s home is his castle, yesterday figures out of the housing market attest to this. A survey by the Royal Institute of Chartered Surveyors showed house prices rose at their quickest pace in 11 years in September, sales also weighed in at a 4 year high.

Another survey by the British Chambers of commerce displayed British firms recording the fastest growth in domestic trade for 6 years.

A dose of noise trading saw Sterling take a hit in mid-morning, this stemmed from a media report that the BOE was planning a long term refinancing operation. The report was misinterpreted and actually concerned a routine repurchase operation scheduled for Wednesday. Nevertheless a fine example of current market conditions experiencing high levels of volatility. Equally it also shows the extent to which hot money has flowed into Sterling on recent good economic news and the U.S political standoff. It does not take much to drive some of that money away.

Presently the U.K economy and Sterling looks rosy, with consistent growth and a widespread bullish sentiment. U.S unease is pushing investors towards Europe and for the meantime Sterling will continue to benefit.

Data releases out of the U.K today include Industrial Production, Manufacturing Production, Trade balance figures. Importantly the BOE will also release their credit conditions survey.

EUR

The Euro traded slightly higher against Sterling. It also inched lower against the dollar in mid session U.S trading as news trickled out that the lawmakers are having constructive discussion over a budget impasse that closed the government and threw efforts to lift the debt ceiling. Overnight trading has seen this trend continue with the Euro losing further ground, however Dollar gains at this stage are nothing to write home about.

Admittedly the gains were minor as both sides are still waiting for the other to make the first proper move. News on the development of the situation is clouded at best with conflicting comments emerging from both the Republican and Democrat camps.

The Euro has enjoyed a recent rally following a positive market response to last weeks ECB meeting in which Draghi demonstrated clear forward guidance over the QE program.

The Euro also saw support after the IMF stated it predicts the E.U economy to contract by 0.4% this year, less than the previous July forecast of 0.5% The 2014 forecast remains the same at 1%

Data releases showed German factory orders dropped 0.3% in August following a 1.9% drop in July. Surprising as gains were widely called.

Data release of note out of the Eurozone today includes German official data on industrial production a leading indicator of overall economic health.

USD

Despite a weak opening, the Dollar pushed back against most currencies yesterday. Presently no reports of solid progress have trickled out of Washington, however there is increasing chatter of improved dialogue between the Republicans and Democrats.

Huge news out of Washington yesterday was Obama’s announcement that Janet Yellen, pending U.S senate approval will replace Bernanke as the new chair of the Fed at the end of January 2014. This was widely expected by the market and came as more of a relief than surprise. As vice chairman her views are widely known and she is expected to continue Bernankes stance of continued Q.E and not alter the program until unemployment hits 7.0% and consistent key growth across the U.S economy is realised.

The White House is universally pleased with the announcement, underpinning the confidence in Yellen to do the job well is also the hope that the news shows that although we are in the midst of a U.S crisis Obama can still concentrate on major economic decisions.

Overnight trading saw the Dollar enjoy much needed gains against the pound and Euro. The Dollar also saw some relief against the Yen which recently has given it a slight beating. The Dollar index erased daily losses although it is still only hovering above 8 month lows.

U.S short term borrowing costs have risen sharply from market concern over the debt ceiling. Yesterday the treasury sold new one month bills at a yield of 35 basis points almost three times the 12 basis point yield offered last week. Interest rates on Treasury bills maturing later this month and in early November have risen to above 30 basis points the highest level since late 2008. This displays banks would rather lend to each other than to Uncle Sam.

Data out of the U.S yesterday showed lower rates have stemmed the decline in mortgage applications, but the shutdown hurts in other ways. Consumer confidence is rolling over, if persistent it will hurt housing and other spending. Small firms are still miserable but the big drop in confidence will come in the October NFIB report.

U.S stocks are still hurting with the Dow and S+P 500 both down. A survey of Wall St anxiety also reveals it has hit its highest level in 3 months.

Data out of the U.S today includes MBA mortgage applications we also have the release of the FOMC minutes.

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Written by Tom Tong

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