Pound hits 5-week high against the euro

Sterling hit a five week high against the single currency yesterday, as the pound was boosted by the optimistic mood in equity markets. Following the better than expected results released by the American banks Wells Fargo and Goldman Sachs in the past week, banking shares in particular have been boosted as investors feel that the global recession may be bottoming out. The pound has benefited from this, as the UK’s economy is heavily reliant on the banking sector, and with the increased risk appetite in markets investors have become willing to buy into the higher risk pound. However, one concern looming for sterling is that the recent rally in the currency may have been slightly overdone, especially if suspicions that the recent boost in equity markets is nothing more than a ‘dead cat bounce’ are proved correct.

It was confirmed yesterday that Fortis Bank made a loss of €20.6bn last year, mainly due to its break up into state control and toxic assets. The bank was broken up last year and put into control of the Dutch, Belgian and Luxembourg governments following a failed rescue attempt. Within the UK overnight, RICS revealed that UK housing market sentiment improved last month, recovering to its strongest level in 13 months during March. The average sales per surveyor increased for the first time since late 2007, although it should be stressed we are coming off extremely depressed levels.

Expect GBP / EUR to take direction from equity markets in the near term, as JPMorgan and Citigroup report their first quarterly results on Thursday and Friday respectively.

Pound boosted by Goldman Sachs quarterly earnings

In Tuesday’s trading the pound strengthened by 0.40 cents to close at 1.4894 after rising equities gave sterling a boost. Banking shares performed well on news of Goldman Sachs’ strong first quarter earnings, which improved risk appetite and saw demand for the pound increase, especially as the health of the UK economy is heavily dependent on the banking sector. There were no major economic announcements in the UK yesterday, but in the US poor retail sales data was released showing that consumer spending had fallen 1.1% in March.

In today’s trading the pound has pared some losses having hit a low of 1.4824 and currently sits around yesterday’s close. This is ahead of the announcement of the Department of Communities and Local Government House Price Index in the UK, and the Consumer Price Index, TIC flows, capacity utilization and industrial production figures in the US. Also announced in America is the NY Empire State Manufacturing Index and the NAHB Housing Market Index, as well as the Fed’s Beige Book. With this barrage of data coming out in the US investors will also be paying close attention to the announcements of quarterly profits from American financial institutions over the coming days, with some suggesting that good figures will spell the end of the woe that has crippled the financial sector.

Euro loses ground to the US dollar

The euro lost ground to the US dollar yesterday, giving back some of Monday’s gains as Fortis Bank confirmed a €20.6bn loss for 2008 following write-downs on debt and the breakup of the business, while German manufacturing sales slid a record 23.3 percent in February compared to a year earlier.

Sentiment was also undermined yesterday afternoon by the release of worse-than-expected Retail Sales figures in the US, which overshadowed better-than-expected earnings reports from Johnson & Johnson and Goldman Sachs and halted the earlier rally on Wall Street.

There are several significant announcements taking place in the US today, including the Consumer Price Index, NY Empire State Manufacturing Index, Net Long Term TIC Flows, NAHB Housing Market Index and the Fed’s Beige Book. There are no announcements due from the eurozone.

New Zealand dollar loses ground

The New Zealand dollar lost some its recent gains over sterling as risk aversion resurfaced. Investor caution returned after poor US data and worries about corporate earnings became apparent. New Zealand first quarter inflation is due on Friday, with consumer prices expected to have risen on the previous quarter but with the annual rate forecast to decline.

Australian dollar consolidates on gains

The Australian dollar consolidated on its recent highs over sterling after market sentiment dampened after weaker than expected US results. Sales in the US unexpectedly fell in March after rising for two straight months, reducing the demand for commodity based currencies. Also, strong first quarter earnings from Goldman Sachs boosted global banking shares, which in return boosted sterling, which is driven by the UK’s heavy dependency on the banking sector.