GBP gains on an otherwise uninspiring day, Euro and Dollar flat.

Tom Tong28/Jan/2014Currency Updates

GBP

A solid yet unspectacular day for the pound yesterday as it quietly crept up against most of its pairs. Sterling ended the session 0.6% up on the Euro and the best part of a cent on the dollar. The best result of the day however was near 1.5% gain against the much-maligned Canadian Dollar, heading back up to three year highs we saw last week.

Although nominally an excellent performance from the UK, the reality is that Sterling is still recovering from Fridays heavy losses, and remains below the highs we saw last week.

Sterling seems to be stimulating a lot of debate at the moment, with bearish investors shouting claims of over extension and pointing to a trade balance that, already at 6.7% of GDP, is being put under even more pressure by a strong pound. The bulls on the other hand point to a string of pleasing data, which has been both varied and numerous across all sectors, as signs of a UK economic recovery are fuelling the currency.

In any case, today’s GDP data, already upwardly revised by the IMF, will give another strong indication of the underlying strength of the UK. Markets are primed for a strong 2.8% Q4 yoy growth, up 0.9% on Q3. Expect action in the markets.

EUR

Even good German business index numbers – up to 110.6 from 109.5 in December, the highest level in three years – couldn’t do much to help the single currency yesterday. It couldn’t manage to hold on to Friday’s gains against the pound, and was insipid against the dollar. It seems that while investors and governments alike search in vain for the light at the end of the recession tunnel, consumers are left to mire in economic purgatory.

The major problem affecting confidence in the Eurozone at the moment is the prospect of deflation, a very real threat if the problematic paradigm of falling inflation continues. Mario Draghi of the ECB has once again adopted an aggressive stance against low inflation by announcing a new, more direct form of quantitative easing. Although his comments have often been met with panic from Euro buyers – see his threat of negative interest rates last month – analysts with one eye on the history books applaud his firmness; Japan’s ten year long deflation slide saw the 90s being labelled the ‘lost decade’.

Minor data only out of the EU today, but things could pick up as the week goes on if inflation figures are above expectations.

USD

A mixed day for the Greenback as investors’ attention flicked back and forth between good data to bad data over the course of the day. The dollar was trading early this morning little changed on the Euro and slightly down on the pound.

Market PMI was up 0.6 points to 56.6 for Jan, while the Dallas manufacturing survey crept up a tenth of a percent. New home buys MoM for December however came in at 0.414, 0.43 down on expectations and 0.31 down on November, although December is often a slow month for home sales, with January generally seeing the biggest annual jump. None of these announcements were particularly far away from expectations, hence the lack of volatility in the reaction.

Much like the UK, this is likely to be the calm before the storm, as the Fed interest rate decision and quantitative easing planned programme reductions are announced on Wednesday.

Today does see a bundle of US data released, including durable goods orders for December.

RoW

Emerging economies have been taking quite a hit recently, as the prospect of higher global interest rates and reductions in asset purchases from central banks send investors out of these newer, more volatile markets.

Yesterday was a particularly bad day, with the Turkish Lira bearing the brunt of the storm. The currency weakened for the 11th straight session by over 2.5% yesterday, before an emergency central bank meeting to discuss interest rates hikes eased the slide. South African Rand and Russian Rouble also suffered, while Argentina is barely beginning to recover from last week. India also surprised investors this morning by raising interest rates up to 8%, following in the footsteps of Indonesia and Brazil.

Expect more EM volatility in the coming months as central banks react to global pressures.

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Written by Tom Tong

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