Sterling trouble, dollar regains ground and euro holds steady.

Tom Tong14/Jan/2014Currency Updates

Sterling suffers a setback in its long rise as dollar regains ground and the euro holds steady. Much of yesterday’s volatility can be put down to the market re-adjusting after the shock of Friday’s jobs report.

GBP

The tone of a poor day for sterling was set early on as Cable dropped half a cent at the open, with investors piling back into the dollar after Friday’s jobs report. A surprise announcement at midday by the Treasury that it would guarantee all UK debt were Scotland to leave the union had the opposite of the desired effect. Cable dropped another half a cent and GBP/EUR fell 0.4% in three hours. Despite the initial reaction this is a prudent move by the Treasury, as it looks to nip fears in the bud before the inevitable chatter about sterling stability closer to the referendum in September. Markets are still unsure whether last week’s disappointing construction and growth reports are a sign of a decelerating UK recovery or just a minor hiccup, but it might have the side effect of easing pressure on Mark Carney to take early action on interest rates.

Data out today includes UK inflation, which is expected to stick around the 2% mark.

EUR

In contrast to sterling the euro managed to hold on to gains made against the dollar last week, hovering around monthly highs. It also recorded gains against the pound, ending the day up nearly half a cent . The recent paradigm of euro over-valuation seems set to continue, although the prospect of negative interest rates still weighs heavily on the market. In better news for the continent, Spain recorded six-year high levels of growth for Q4 2013, expanding at 0.3%. Unemployment is also showing signs of falling in a country plagued by youth unemployment of 25%. As always with the single currency, other countries must follow suit if confidence in the euro is to increase.

Minor data out today including Europe-wide industrial production and Italian levels of inflation.

USD

The veil of uncertainty over Friday’s jobs report that saw the Greenback lose ground against most of its peers was brushed aside over the weekend, with analysts blaming the poor figures on bad weather and a drop in the number of those seeking work. Dollar buyers agreed with the sentiment, causing the currency to retrace losses over the course of the day. While currency markets were convinced, equity markets were less bullish and Wall Street saw its steepest decline since November, with the CBOE Vix index of equity volatility – the ‘fear gauge’ rose 11%. The bearish sentiment was reflected in Asia, as investors turned to the yen to escape falling stocks. The Japanese currency consequently enjoyed a 1.1% overnight rise against the dollar, although the massive current account deficit in Japan will likely send the dollar up to 108 in coming months.

Data out of the US today includes December retail sales, expected to be 0.1% from 0.6% in November.

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Written by Tom Tong

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