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Publication date: 25 January 2011
Author: Duncan Higgins, CaxtonFX
Economic growth figure to add to sterling’s woes?
It was a similar story of euro strength and dollar weakness yesterday as the currency pressed on to fresh two-month highs. The political turmoil in Ireland has had little or no impact on the euro’s rally, with the market still content to see the level rise. The offshoot of this is that sterling is continuing to lose ground, dropping below 1.17 this morning back to late December’s levels.
Unfortunately the one day outlook for the pound rests on the shoulders of the UK’s fourth quarter economic growth figure due today at 09:30. Although the market forecast is for a 0.5% quarter-on-quarter rise, there are plenty of suggestions of a weaker figure, which could add to sterling’s woes.
The pound dropped to a three-week low against the single currency yesterday, its fifth consecutive session on the slide.
The easing of concerns over the debt crisis in the eurozone is continuing to lend support to the euro. Having been sold aggressively during the early part of the year, investors, particularly from the Far East, have been pouring back into the euro as market sentiment improves.
Tough talk about keeping inflation in check from European Central Bank chief Jean-Claude Trichet also helped spur the rally.
Further support for the euro today is likely to come as buyers queue up to buy eurozone debt. Europe’s bail-out fund is expected to be flooded with orders. The European Financial Stability Fund will raise the maximum allotted amount of €5bn in five-year bonds.
Meanwhile a busy UK calendar this week gets started today with the UK’s first estimate of fourth-quarter gross domestic product. Downside risks to the forecast figure of 0.5% appear the most likely with December’s weather conditions hurting construction activity as well as the services sector.
UK borrowing data is also due today leaving a lot for the market to digest. Whereas we still see a turnaround in the trend between this pair in the short term, it looks unlikely to come today.
Sterling managed to hold near its recent highs amid broad dollar weakness yesterday but the price is slipping this morning ahead of the UK GDP figures.
Neither currency has been in favour recently, which has led to relatively range bound trading for this pair. The pound did get a helping hand from the euro’s continued rise against the US dollar, which briefly brought the $1.60 level back into view.
However, ahead of this morning’s UK data, a return to $1.60 is looking a little optimistic. Even with the dollar continuing to lose ground to the euro, sterling is inching back towards $1.59.
Also weighing on the UK currency at present, speculation about an interest rate rise from the Bank of England is losing credibility. Andrew Sentance, the one policy maker that has consistently voted in favour of such a policy for the past three months, reiterated his stance yesterday evening but the market chose to brush the comments aside. The minutes tomorrow should offer a clearer view.
Figures from the US are also due this afternoon, but they’re unlikely to have too dramatic an impact with the proximity of the Fed meeting set to take the edge off any regular monthly data.
Onwards and upwards for the euro; maybe not quite in a straight line, but nonetheless the pair is still outperforming most forecasts.
Over the past fortnight the single currency has now rallied by 6% against the dollar, moving through a number of key resistance levels along the way.
Euro strength has come about as a level of confidence returns to the eurozone, with US dollar weakness following firmer equity prices also helping the movement.
However, the consensus remains that the rally will run into trouble around $1.37. That level may well prove too appealing for investors to ignore and they’ll start to sell the currency.
There can be little doubt that the problems in the eurozone will flare up once again with an underlying resolution still some way off. In fact the IMF is weighing back in on the situation stating that the European stability fund needs to be expanded in order to ensure a sustained return of confidence.
This morning, the euro’s momentum is showing signs of abating, with the price struggling to push beyond $1.3650.
The pound dropped off the 1.60 level yesterday as higher equity and commodity prices lent support to the aussie dollar.
Sterling was lower across the board yesterday, and its movement against the aussie was no different. A little profit taking and firmer equity prices helped the higher-yielding currency but we don’t see the move enduring for too long.
Benign inflation data from Australia this morning has reinforced market expectations that the central bank will not raise interest rates again until well into the year.
In addition, the flooding is beginning to affect Victoria, which will likely add to concerns about the economy.
This morning the price is holding near 1.60 with the pair likely to remain within range in the near term as investors await key US announcements later in the week.
STERLING/NEW ZEALAND DOLLAR:
Sterling has struggled against the New Zealand dollar in the past couple of sessions as investor’s book profit on the kiwi’s fall.
Firmer equity and commodity prices helped the kiwi outperform yesterday, despite the upcoming RBNZ policy announcement.
The chances of a shift in policy are almost zero given the sluggish nature of the domestic economy, but the market will be looking to the language of the accompanying statement.
In line with sterling’s broader movement this morning, the price is continuing to move lower with the pair currently trading around 2.08.
Trading between this pair was light yesterday with the price remaining virtually unchanged as the market awaits US announcements later this week.
The Canadian dollar struggled to edge higher as crude oil prices fell after Saudi Arabian Oil Minister Ali al-Naimi signaled OPEC may bolster production. Crude oil, Canada’s biggest export, declined as much as 1.8%.
However, the pound has slipped this morning back to 1.58. With the Bank of Canada making clear its intentions to keep policy on hold (in order to prevent further CAD appreciation) the downside risks for sterling should be limited. The risk is that a stronger US currency following an upbeat Fed statement later in the week could drag the CAD slightly higher.
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