Sterling storms up across the board - GBP/USD at 4 year highs

Tom Tong17/Apr/2014Currency Updates

GBP

Sterling was flying across the board yesterday. London closed with sterling battering the dollar and we now have the pound trading at 4-year highs against the greenback. The FTSE saw gains after a choppy week, being led higher by retailers.

Massive momentum was taken from the UK unemployment figure which took all by surprise. A figure of 7.1% was called whereby it was weighed in at 6.9%. This decrease in unemployment is far quicker than all predictions and adds leverage to the revised BoE and IMF growth forecasts for the UK economy.

Of course, these sterling levels bring the usual lyrics in the market about the pound being overextended. However, the doubters are temporarily silenced and the pound keeps on pushing.

Spotlights will again swing to the BoE. Carney previously stated that unemployment falling below 7% would be a catalyst for considering an initial interest rate hike. The market will stay hinged on his response.

No data out of the UK today.

EUR

London closed with the euro down against sterling after a pound rally across the board. Euro gains against the dollar following Yellen’s comments.

Eurozone inflation yesterday was again a poor show. Inflation in March dropped to its lowest level since November 2009. This keeps pressure on the ECB to intervene if prices do not rebound. Year on year inflation in the euro bloc was 0.5% in March, down from 0.7% in February. This is the 6th month on the bounce that inflation remains in the self-proclaimed “danger zone” coined by Draghi, to describe the situation. Last week ECB policy makers said they stand ready to wheel out unconventional measures to counter inflation spiralling into deflation. Analysts feel inflation will pick up marginally in April as travel prices typically rise.

Draghi expressed concerns over euro strength in NY on the weekend. It appears he is trying to talk the euro strength gently down. Put simply the current strength of the currency makes imports cheaper and exports more expensive, thus pushing down the prices Europeans pay for goods and services. Whilst this gives households more purchasing power in the short run, it makes paying off Eurozone debt more expensive and the ECB wants to avoid a drop in inflation expectations.

German PPI came in higher than expected this morning at 0.9%, only other data will be Greek current account figures.

USD

The dollar dipped across the board after Yellen said the central bank has a continuing commitment to support the economic recovery. It appears there is a minor dollar sell off with traders taking profits and shorting on the dips.

Yellen, in her first major speech on policy framework, said US central bankers must be mindful of how short the Fed is of its goals, of drastic falls in employment and price stability. She also discussed how there remains a significant employment shortfall, along with a declining participation rate. All this chatter again throws up talk over QE and the likely timescale for an interest rate alteration. QE is expected to be finished by October with an interest rate alteration following shortly after. Of course, this is tied to a continual drop in unemployment and wider improvement in the US economy.

Ultimately the dollar pivot yesterday serves to display how much comments by central bankers drive market movements and this is unlikely to change anytime soon.

Data of note today includes- initial jobless claims, continuing jobless claims and the Philly survey

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Written by Tom Tong

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