After making strong gains against the euro yesterday and climbing to a 2-week high this morning, the pound has now begun weakening as investors buy into the US dollar as they brace for the results of the stress tests on US banks due tomorrow.
Concerns about the stress tests were heightened after a source familiar with the tests said Bank of America required as much as $34 billion in extra capital. Markets are also cautious ahead of tomorrow’s policy decisions from the European Central Bank and the Bank of England, in addition to US non-farm payrolls data due on Friday.
Wednesday 6 May 2009
Pound makes strong gains against the euro
The pound strengthened considerably against the euro yesterday as a strong performance on London equity markets improved investor sentiment that the UK may be close to an economic recovery. Easing concerns over the threat of swine flu and rising oil prices helped the FTSE 100 to hit a four-month high yesterday, finishing up 93.7 points. With the UK economy so dependent on the financial services and banking sector, the index’s strong performance yesterday drove demand for sterling against the single currency, as investor confidence that the recession may be bottoming out improved.
The pound also strengthened against the euro yesterday after forecasts released by the European Commission on Monday revealed a deepening recession in the eurozone. The commission’s report predicted the region’s economy would shrink by 4% this year, more than double the contraction projected in January, and 0.1% in 2010. It also said it expected the region’s inflation to average out at 0.4% this year, the lowest since the currency’s introduction ten years ago. Whilst it therefore seems increasingly likely the ECB will cut its interest rates to a record low of 1% tomorrow, President Jean-Claude Trichet has been tight-lipped in recent weeks over what other measures the central bank could take to stem the recession. Adding to the uncertainty, ECB Council member Athanasios Orphanides said yesterday that the financial crisis needs “drastic” measures, adding he would not rule out cutting the key interest rate to below 1% and embarking on a quantitative easing program similar to that employed by the US Fed and Bank of England earlier this year. Speculation surrounding what measures the ECB intends to introduce when it announces its decision tomorrow weighed on investors’ minds, and they therefore opted to buy into sterling instead. Interestingly, in contrast to the uncertainty surrounding the ECB’s interest rate decision tomorrow, investors are relatively relaxed about the Bank of England’s monetary policy meeting tomorrow, where most analysts expect it to follow the US Fed’s lead last week and simply keep everything on hold. As a result, sterling finished the day up against the euro at 1.1314.
In early trading today, the pound has pared some of yesterday’s gains as investor wariness ahead of the two big interest rate decisions continues. There are no major announcements due in the UK today, whilst in the eurozone Month-on-Month and Year-on-Year Retail Sales figures are due at 10.00 BST.
The pound also strengthened against the euro yesterday after forecasts released by the European Commission on Monday revealed a deepening recession in the eurozone. The commission’s report predicted the region’s economy would shrink by 4% this year, more than double the contraction projected in January, and 0.1% in 2010. It also said it expected the region’s inflation to average out at 0.4% this year, the lowest since the currency’s introduction ten years ago. Whilst it therefore seems increasingly likely the ECB will cut its interest rates to a record low of 1% tomorrow, President Jean-Claude Trichet has been tight-lipped in recent weeks over what other measures the central bank could take to stem the recession. Adding to the uncertainty, ECB Council member Athanasios Orphanides said yesterday that the financial crisis needs “drastic” measures, adding he would not rule out cutting the key interest rate to below 1% and embarking on a quantitative easing program similar to that employed by the US Fed and Bank of England earlier this year. Speculation surrounding what measures the ECB intends to introduce when it announces its decision tomorrow weighed on investors’ minds, and they therefore opted to buy into sterling instead. Interestingly, in contrast to the uncertainty surrounding the ECB’s interest rate decision tomorrow, investors are relatively relaxed about the Bank of England’s monetary policy meeting tomorrow, where most analysts expect it to follow the US Fed’s lead last week and simply keep everything on hold. As a result, sterling finished the day up against the euro at 1.1314.
In early trading today, the pound has pared some of yesterday’s gains as investor wariness ahead of the two big interest rate decisions continues. There are no major announcements due in the UK today, whilst in the eurozone Month-on-Month and Year-on-Year Retail Sales figures are due at 10.00 BST.
Pound strengthens to 4-month high against the US dollar
The pound strengthened against the US dollar yesterday, hitting a four-month high as the bull-run on the FTSE 100 continued and risk-appetite improved strongly. The FTSE 100 finished up 93.7 points yesterday at 4336.9 as rising oil prices and concerns over the threat of swine flu eased. Banks in particular performed strongly yesterday, as the index notched up its best month in six years in April. Although there was some wariness in the market ahead of the results of US government “stress tests” on major American banks, carry trade activity also increased yesterday morning as investors sold off perceived low-yield dollar assets to purchase higher-yielding sterling stock. The pound broke through the psychological $1.50 level mid-morning, briefly touching the $1.51 level, although investor caution over the Bank of England’s policy meeting later this week capped its gains. Most analysts fully expect UK interest rates to remain on hold at 0.5%, but the market remains nervous about whether the central bank plans to extend its quantitative easing program beyond the current £75 billion. Sterling’s gains were also capped to some extent yesterday morning as investors continued to digest the European Commission’s revised growth forecasts released on Monday. It predicted the UK economy would shrink by 3.8% this year and grow 0.1% in 2010, two figures at odds with Chancellor Alistair Darling’s forecasts outlined in his budget two weeks ago.
The pound’s gains against the dollar were extended yesterday afternoon after a better-than-expected services industries report released in the US further improved investor risk appetite. The Institute for Supply Management index for April came in at 43.7, a marked improvement on the 40.8 figure for March. Although this still represents a contraction, it is the slowest contraction in the sector for six months, further fuelling hopes that a recovery may soon be underway. Elsewhere, Fed Chairman Ben Bernanke’s evidence before a congressional Joint Economic Committee provided investors with an insight into the central bank’s thinking going forward. He echoed last week’s Fed interest rate announcement that the bank has no intention of halting its quantitative easing program at the moment. This news further encouraged investors to sell dollars and buy into the “riskier” pound as they concluded the Fed’s measures must therefore be working and a global economic recovery may not be too far off. However, the pound did retract slightly from its peak late yesterday afternoon as traders became more cautious ahead of tomorrow’s Bank of England meeting and release of the US bank “stress test” results. Nevertheless, sterling finished the day up at $1.5084.
In early trading today, the pound has pared some of its gains against the dollar as investors become increasingly nervous about tomorrow’s two major announcements. There are no major data releases in the UK today, while in the US the ADP Employment Change figures for April are due at 13.15 BST.
The pound’s gains against the dollar were extended yesterday afternoon after a better-than-expected services industries report released in the US further improved investor risk appetite. The Institute for Supply Management index for April came in at 43.7, a marked improvement on the 40.8 figure for March. Although this still represents a contraction, it is the slowest contraction in the sector for six months, further fuelling hopes that a recovery may soon be underway. Elsewhere, Fed Chairman Ben Bernanke’s evidence before a congressional Joint Economic Committee provided investors with an insight into the central bank’s thinking going forward. He echoed last week’s Fed interest rate announcement that the bank has no intention of halting its quantitative easing program at the moment. This news further encouraged investors to sell dollars and buy into the “riskier” pound as they concluded the Fed’s measures must therefore be working and a global economic recovery may not be too far off. However, the pound did retract slightly from its peak late yesterday afternoon as traders became more cautious ahead of tomorrow’s Bank of England meeting and release of the US bank “stress test” results. Nevertheless, sterling finished the day up at $1.5084.
In early trading today, the pound has pared some of its gains against the dollar as investors become increasingly nervous about tomorrow’s two major announcements. There are no major data releases in the UK today, while in the US the ADP Employment Change figures for April are due at 13.15 BST.
Euro falls from 1-month high against the US dollar
The euro fell from a one-month high against the US dollar in early trade yesterday as the market continued to digest a European Commission report released on Monday, which forecast a deepening recession in the 16-nation region. It predicted a 4% contraction in the eurozone this year and growth of just 0.1% in 2010, therefore making a 25 basis point interest rate cut by the ECB to 1% tomorrow increasingly likely. However, what is less clear is whether the central bank intends to embark on a quantitative easing program similar to that of the US Fed or Bank of England to stimulate the recession-hit eurozone. Adding to the uncertainty, Greek ECB council members Athanasios Orphanides and George Provopoulos said yesterday that they would not rule out slashing interest rates below 1% and buying debt to pump money into the economy. As a result, speculation surrounding what measures the central bank will announce tomorrow made investors increasingly cautious about how long the region’s recession will last, and they therefore bought into the perceived safe-haven of the greenback.
The US dollar also gained strengthen against the euro as concern surrounding the results of US “stress tests” decreased demand for the euro. News that Bank of America Corp. may need $34 billion in new capital, according to those close to the tests, induced a flight to safety as investors looked to reduce risk. It is thought that as many as ten out of the nineteen financial institutions tested by US government officials would require extra capital should the recession deepen, although Bank of America is thought to face the largest need. The formal results are due for release tomorrow.
Early in the afternoon, however, the dollar’s gains were reduced against the single currency after Federal Reserve Chairman Ben Bernanke said the contraction of the US economy may be easing. Giving evidence before the congressional Joint Economic Committee, Mr. Bernanke gave no indication that the Fed intends to withdraw from its unprecedented policy of keeping interest rates at virtually zero and boosting credit through emergency-loan programs and asset purchases. The greenback’s morning gains were also capped by a better-than-expected report released by The Institute for Supply Management in the US midway through the afternoon. It showed that in April, American service industries, which make up almost 90% of the economy, contracted at their slowest pace for six months, indicating that the economic slump may gradually be abating. Although anything less than 50 still represents a contraction, the index rose to 43.7 last month from 40.8 in March. Nevertheless, the dollar finished the day up against the euro at 1.3328.
In early trading today, the euro has continued its slide against the greenback, as investor wariness over tomorrow’s US “stress test” results and the ECB’s interest rate decision continues. At 10.00 BST, Month-on-Month and Year-on-Year Retail Sales data for March is due in the eurozone, whilst at 13.15 BST ADP Employment Change figures for April are due in the US.
The US dollar also gained strengthen against the euro as concern surrounding the results of US “stress tests” decreased demand for the euro. News that Bank of America Corp. may need $34 billion in new capital, according to those close to the tests, induced a flight to safety as investors looked to reduce risk. It is thought that as many as ten out of the nineteen financial institutions tested by US government officials would require extra capital should the recession deepen, although Bank of America is thought to face the largest need. The formal results are due for release tomorrow.
Early in the afternoon, however, the dollar’s gains were reduced against the single currency after Federal Reserve Chairman Ben Bernanke said the contraction of the US economy may be easing. Giving evidence before the congressional Joint Economic Committee, Mr. Bernanke gave no indication that the Fed intends to withdraw from its unprecedented policy of keeping interest rates at virtually zero and boosting credit through emergency-loan programs and asset purchases. The greenback’s morning gains were also capped by a better-than-expected report released by The Institute for Supply Management in the US midway through the afternoon. It showed that in April, American service industries, which make up almost 90% of the economy, contracted at their slowest pace for six months, indicating that the economic slump may gradually be abating. Although anything less than 50 still represents a contraction, the index rose to 43.7 last month from 40.8 in March. Nevertheless, the dollar finished the day up against the euro at 1.3328.
In early trading today, the euro has continued its slide against the greenback, as investor wariness over tomorrow’s US “stress test” results and the ECB’s interest rate decision continues. At 10.00 BST, Month-on-Month and Year-on-Year Retail Sales data for March is due in the eurozone, whilst at 13.15 BST ADP Employment Change figures for April are due in the US.
New Zealand gains ground
The New Zealand dollar gained ground on both the aussie and sterling yesterday, as it was aided was improved appetite for riskier investments. Recent data revealed that New Zealand's main commodity exports had their largest monthly rise in 2 years. However, prices were still below 2008 levels. The kiwi is likely to continue to be directed by equity market movements for the shorter term, as investors use this as a gauge for risk appetite.
Australian dollar falls off recent highs
The Australian dollar fell off recent highs against the pound yesterday, as UK markets played catch up after a public holiday on Monday. Despite an initial rise in share markets they eventually finished down as investors took profits ahead of key economic releases. Thursday's official release of stress testing on US banks remains a major hurdle for the financial sector, so investors will be reluctant to take on further risk. UK PMI figures will be the main focus today, although direction over the next few days is likely to be driven by broader market movements.
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