Choppy trading for sterling / euro

In a choppy day for sterling / euro, the pound surged above the 1.10 mark in early trading following the announcement from Nationwide that house prices rose 0.9% in March despite many expecting that they would continue to fall. While it should be stressed that it is still too early to say that the housing market has turned the corner, the news proved to be a boost for sterling. We also saw equity markets rallying in the morning, which continued throughout the day as markets responded positively to the G20 world leaders agreeing a coordinated $1.1 trillion of funds being pumped into the world’s economy. By the end of the day the FTSE 100 was up 4.3%, whilst in Paris the Cac 40 jumped 5.4% and in Frankfurt the Dax finished 6% up. The risk appetite in the market was another boost to sterling as investors picked up higher risk currencies such as the pound.

However, the pound’s gains were tempered as the European Central Bank defied many forecasts and decided to cut interest rates by 0.25%, instead of the widely anticipated 0.5%. The smaller than expected cut ensures the single currency still enjoys a significant yield advantage over sterling and the single currency did strengthen somewhat over the pound as a result. However, the pound still finished the day higher against the single currency, as the central bank’s decision was made by consensus, as a split has emerged within the governing council. It is also interesting to note that Jean-Claude Trichet did not rule out cutting interest rates further and using unconventional means to rejuvenate the economy, similar to the quantitative easing that has been seen in the UK and the US of late. The ECB has now cut rates from 4.25% since October last year as the eurozone economy has struggled through the financial crisis, but their base rate still stands higher than many other major economies. The OECD has forecast that their economy as a whole would contract by 4.1% this year, despite the ECB’s worst case scenario being a 3.2% contraction.

Both the UK and the eurozone release their PMI services data this morning, for an indication of how the service sector is performing at present.

Improved confidence drives cable up

In Thursday’s trading the pound strengthened by 2.54 cents over the US dollar to close at the 1.4724 level, as improved confidence saw demand for the pound increase. Investor confidence improved primarily on rallying equities, with the FTSE index up 3.2%, which was driven by optimism that the G20 leaders would come together with a coordinated plan to combat the global recession and banking woes. The world leaders decided to treble the resources available to the International Monetary Fund to $750 billion and also provide it with a further $250 billion of Special Drawing Rights – its own currency basket of dollars, euros, yen and sterling – to boost the foreign exchange reserves of every country. Also in the UK, news from Nationwide that house prices rose 0.9% in March gave the pound further support. In the US it was announced that 669,000 newly unemployed Americans registered for benefits on top of the 5.728 million already receiving aid.

In today’s trading the market has remained around yesterday’s close after Halifax reported that they believed house prices fell 1.9% in March. Later today purchasing managers index services data is released in the UK, whilst Average Hourly Earnings, Average Weekly Hours, Nonfarm Payrolls, the Unemployment Rate and ISM Non-Manufacturing figures are released in the US.

Dollar weakens against the euro after G20

The dollar weakened against the euro yesterday following the conclusion of the G20 meeting where it was announced that there would be more than $1 trillion provided in order to improve the state of the global economy. This has reduced demand for the dollar as a safe haven currency, as investors are more inclined to invest in riskier currencies on the back of this news. Additionally, it was announced that the G20 have agreed to let the IMF create $250 billion of Special Drawing Rights (its own currency consisting of dollars, sterling, euro and yen) in order to boost the foreign exchange reserves of every country. Stock markets also jumped yesterday following the announcement, with the FTSE 100 closing 4.3% higher and the Dow 2.8%.

Yesterday the ECB cut interest rates by just 0.25%, as opposed to an anticipated 0.50%. Trichet stated that he was not ruling out cutting interest rates further if required in the near future. Analysts are also predicting that the ECB will announce quantitative easing measures – it is likely that they will purchase private sector assets in order to do this. The ECB will announce “full details” of possible further non-standard measures in May, Trichet said. Trichet also stated that he expects the economy to improve next year.

Investors are now eagerly awaiting the US Nonfarm Payrolls data, which is due to be released today at 13.30 BST. It is expected that the data will show a rise in unemployment from 651,000 in February to 658,000 in March.

Other significant announcements taking place in the US today include Average Hourly Earnings, Average Weekly Hours and the Unemployment Rate. The Fed’s Bernanke will also be making a speech at 16.00 GMT. There are no significant announcements taking place in the eurozone today.

New Zealand dollar holds steady

The New Zealand dollar remained largely steady yesterday as investors remained wary of the Reserve Bank of New Zealand's warning earlier this week of continuing low interest rates. However, the kiwi did gain some support from a boost in equity markets and an increase in investor risk appetite, after the announcement from the G20 of a massive coordinated stimulus package.

Australian dollar driven to 10 week highs

The Australian dollar was driven to 10 week highs against sterling yesterday, after world leaders announced a trillion dollar deal to rescue the global economy. Investors’ optimism that the worst of the economic decline may be over drove share markets higher and increased the appeal of high yielding currencies such as the aussie. Market optimism was also supported by data on British house prices, which showed an increase in March for the first time since October 2007. Banks also fared better, with the UK government agreeing to back some of RBS's business loans. However, despite the positives for the UK economy, the aussie being a largely risk and commodity based currency continued to fare better.