Cable continues to rise

The pound continued its rise against the US dollar yesterday as some stronger-than-forecast data released on both sides of the Atlantic improved risk sentiment. In early trading, sterling strengthened against the dollar after better-than-expected UK service sector data bolstered investor appetite for risk. The most recent CIPS/Markit survey showed the pace at which the UK’s service sector contracted fell to its slowest rate in eight months. April’s reading of 48.7, up from 45.5 the previous month, was the highest figure since August 2008 and the biggest rise in the index since April 1999. Although still below the 50 points level, and therefore a contraction rather than an expansion, the reading was still well ahead of analysts’ predictions for a more moderate improvement to 46 points.

However, increased speculation surrounding the results of US government “stress tests” on nineteen American banks capped sterling’s gains yesterday, particularly after reports surfaced that the largest US bank, Bank of America, would need an extra $34 billion should the recession take a turn for the worse. It is thought that Wells Fargo and Citigroup will also need to strengthen their balance sheets considerably. The formal results of the tests will be released at some point today. Also weighing on sterling’s gains against the greenback yesterday was uncertainty in the market over what the Bank of England will decide at their policy meeting later today. Most analysts are agreed that the bank will not move interest rates from the current 0.5%, but what is less clear is whether it intends to extend its quantitative easing program beyond the current £75 billion. As a result, some investors shied away from the perceived “riskier” pound, preferring instead to keep their capital in the perceived safe-haven of the US dollar. Nevertheless, the pound was slightly up against the greenback by yesterday lunch.

Early yesterday afternoon, sterling extended its gains against the dollar after much stronger-than-forecast US ADP Employment Change data was released to the market. April’s figure of -491k was far ahead of the -644k analysts had predicted and also a marked improvement on March’s figure of -742k. Investors took the reading as a strong sign the global economy may be on the cusp of a recovery and therefore they started buying into the higher yielding pound. However, sterling’s gains were cut short in late trading yesterday as some traders cashed in on recent gains ahead of the Bank of England’s key monetary policy meeting later today. However, sterling still finished the day up against the greenback at $1.5134.

In early trading today the pound has pared some of yesterday’s gains, as many traders remain unwilling to take aggressive positions ahead of today’s potentially market-moving interest rate decision. The Bank of England will make its announcement at 12.00 BST. In the US, First Quarter Non-Farm Productivity figures are set for release at 13.30 BST, while Fed Chairman Ben Bernanke is due to give a speech at 14.30 BST. The results of US government “stress tests” are also due at some point today.