GBP soars on positive data, hitting 11-month peak against the USD and 5-year high against the yen

Tom Tong28/Nov/2013Currency Updates

GBP

Second Quarter GDP sent sterling skyrocketing yesterday. Upon GDP and market sentiment being unveiled in the morning sterling sledgehammered to hit serious gains across the board. Midday trading saw resistance levels hit for six and sterling sitting pretty on an 11-month peak against the greenback, 5 year high against the Yen and overall a 14 month high against its trade weighted basket of currencies.

Second quarter GDP came in at 0.8% showing U.K growth at its highest level in 3 years. YoY growth sat at 1.5%. Based on these levels, next years BoE predictions of 2.8% growth for 2014 appear realistic. Perversely, following the data release sterling initially dipped as various dark pools and market makers had priced in GDP of 0.9%. However, large reactive investors then piled into the market, correcting the fall within minutes and sending Sterling soaring till the afternoon.

The data allows a greater insight into the source of growth, predominately household spending and consumer spending have coupled with government spending to fuel growth. Pockets in both the Houses of Parliament and houses of the public are increasingly being dipped into with everyone more willing to splash out. Ultimately after hiding in the wings during the recession, consumption is returning to the stage. Equally business investments are notably picking up all chipping in and flinging the wider economy and sterling to fresh highs.

U.K bulls are now out the pen and the short term view will revolve around seeing if these sterling levels are sustainable. Despite anticipated low trading levels over the rest of the week due to Thanksgiving, notable pivots are still to be expected with intraday volatility heightened.

No data out of the UK today, although we have Carney talking at 10.30 and a financial stability report in the afternoon.

EUR

Euro enjoyed gains following encouraging data out of the eurozone and market confidence taking leverage from the formation of the German coalition government. Euro hit a 1-month high against the greenback and 4-year high against the Yen. Inevitably falling against the pound after the sterling rally. Accordingly investors feel a little more reassured about the eurozone from German growth and a solid government. As Europe’s largest economy and the worldwide leader in eurozone political situations, the market views Germany as the pilot on what is presently a tricky journey for Europe and its currency. Although in tussles with the ECB over German fiscal policy and trade surplus, new German budget plans appear expansive which will help the euro.

Whilst now on firm footing the euro will probably struggle to add notably to current levels as further monetary easing is still lurking in the shadows and making the market jumpy. The cut took everyone by surprise and with growth and employment gains staying tepid the threat of further monetary easing to counter deflation and a halt in growth remains real. The ECB is keen to reinforce the odds of this eventuality are slim and thus return some stability to the market perception on Europe. The ECB proclaimed yesterday that whilst technically ready to cut the deposit rate, it remains an unlikely measure only to be considered as an extreme measure.The ever nervy ECB also alluded to their worries over the effect of the inevitable US taper on euro trading levels. Increased volatility is called and the ECB attempted to prime markets for increased movement in a financial report released yesterday. They also reassured investors that they are making moves to prepare. One can question what they really can do as it’s unlikely that even the ECB have a solid idea of the timescale for a taper.

Data of note out of Europe today includes – consumer sentiment, economic sentiment and money supply. Equally important releases will be Spanish, German and Swiss GDP.

USD

A mixed day for the US Data was variable and slightly difficult to interpret with market response unpredictable at best. The greenback was caught slipping and London closed with the greenback down against both the euro and dollar. The dollar hit an 11-month low against the pound and 2-week low against the euro. Asian trading was quiet with the major crosses bouncing between resistance levels. Conversely US stocks continue to fly high – the Dow and S&P 500 clocked in at record highs, the NASDAQ roared in at a 13- year high all of this rolling of record highs achieved last week.

Varied bundle of data out of the US yesterday with Dollar response surprisingly flat. Jobless claims looked great although the Labor Dept warned seasonals may not be reliable. The figures have been fairly accurate recently with a consistent downwards trend in unemployment levels. Jobless claims fell to 316K from 326K below the forecast of 326K. If claims can trend at anything like this level through the inevitable noise of Thanksgiving and then the holiday season, that would mark a real improvement on the pre-shutdown period and would be consistent with stronger payroll growth. Durable good dipped and mortgage applications came in flat. Positively Chicago PMI was relatively strong.

Speculation remains rife as to when the Federal Reserve will choose to begin tapering its monetary easing programme and today’s mixed data did little to clarify which direction the Fed will choose. There is one Non-Farm Payroll report left for this year, if we see exceptional levels a taper could be up FED sleeves, however the street continues to call a taper for Q1 next year.

No data out of the US today.

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Written by Tom Tong

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