Sterling bounces back despite inflation figure

Sterling bounced back against the single currency yesterday after better-than-expected economic data and rising equity markets boosted the pound.

• Sterling initially benefited with better-than-expected housing and retail sales figures being released early on Tuesday morning.
  
• Inflation figures were released in the UK that were as expected – the consumer price index fell below the Bank of England’s target of 2% for the first time since September 2007, whilst the retail price index stands at -1.6%
  
• With the inflation figures coming in as expected, it seems that the Bank of England has room to keep interest rates on hold at 0.5% and possibly extend its quantitative easing programme further as deflation seems the most imminent threat, and they will worry about inflation in the future.
  
• Bank of England policymaker-desgnate Adam Posen said he expected the UK currency to trade higher against the euro in the medium term.
  
• Within Germany, ZEW released their economic sentiment survey that revealed a decline in economic expectations within Europe’s largest economy. The indicator dropped to 39.5 points, whilst analysts were expecting it to rise to 48.0 points.
  
• The pound was further boosted with the equity markets doing well – the FTSE 100 rose 0.9%, with miners, banks and oil groups doing particularly well. The banking sector was buoyed by Goldman Sachs stellar second-quarter results.
  
• Within the UK this morning, investors will take note from unemployment data being released, whilst within the eurozone, the consumer price index is released.

Pound after Goldman Sach's results

The pound strengthened by 0.51% against the dollar yesterday to finish the day at $1.6307.

• The pound continued to strengthen against the dollar yesterday following the release of Goldman Sachs’ second-quarter earnings. They reported a profit of $3.44bn ($4.93 per share), much more than the forecast of $3.42 per share. Such positive results have resulted in renewed optimism in the financial sector thus increasing investors’ demand for riskier currencies.
  
• JP Morgan Chase will be announcing their earnings tomorrow whilst Citigroup and Bank of America will follow on Friday.
  
• Consumer price inflation data was announced in the UK yesterday which showed that inflation has fallen below the Bank of England’s 2% target rate. This is the first time this has occurred since September 2007 which indicates that the BOE’s measures of combating the recession such as cutting interest rates and implementing quantitative easing has had an effect on prices, however it is likely that rates will remain at 0.5% well into 2010. Analysts are also speculating that quantitative easing will be extended in the future.
  
• House price data was also released by the Department for Communities and Local Government in the UK yesterday showing a smaller fall in May in comparison to the previous month thus also suggesting positive signs that the economy is beginning its recovery.
  
• In the U.S., the FOMC minutes will be a focal point for today, which will be scrutinised for insights on the Fed's decision not to increase its quantitative easing measures at the June 23/24 policy meeting. It is likely that the minutes will show the Fed decided to remain steady in order to improve the current economical situation and also in order to detract from concerns over deflation. Such statements are likely to increase risk appetite further.
  
• In the UK, jobless claims data and unemployment rate will be released today. In the US, MBA Mortgage Applications, Consumer Price Index and Industrial Production will also be announced this afternoon.

German ZEW survey hits single currency

The euro weakened by 0.01 cents (0.07%) against the US dollar yesterday to close the day at $1.3965.

• A worse-than-expected German ZEW Economic Sentiment survey figure released early yesterday weakened the single currency initially. This month’s reading of 39.5 was well down on the 42.7 registered in June, as well as analyst forecasts of 48.0.
  
• However, the euro’s falls were capped by some positive data out of the US mid-afternoon, prompting an increase in investor appetite for riskier currencies. This month’s US PPI figure and Retail Sales data were both well ahead of analyst predictions.
  
• Finally, much stronger-than-forecast results released by Goldman Sachs, who reported a 65% rise in second-quarter profits to £2.1 billion, also buoyed investor risk appetite as they speculated the worse of the recession could now be over.
  
• There are no important announcements out in the eurozone today, whilst in the US Core CPI data is out at 13.30 BST and FOMC Meeting Minutes are due at 19.00 BST.

Aussie heads higher after positive US data

The pound lost further ground against the Australian dollar yesterday as better-than-expected retail sales data out of the US prompted demand for the higher-yielding Aussie.

• Equity markets is Asia extended their recent rally in early trading yesterday, boosting demand for the Australian dollar. Mining continued their recent upwards trend – good news for commodity-rich Australia.
  
• Better-than-expected retail sales data out of the US also boosted risk appetite in markets. The Aussie continues to enjoy a significant yield advantage over the pound with the Reserve Bank of Australia’s benchmark interest rate standing at 2.5%.
  
• Unemployment figures are released in the UK today, whilst nothing major is due for release in Australia. Expect trading to take direction off equity markets and broader market movements.

Kiwi up as risk appetite improves

The pound weakened against the New Zealand dollar yesterday as general risk appetite improved.

• The New Zealand dollar strengthened overnight due to an increase in risk appetite. Goldman Sachs announced much better-than-expected second-quarter earnings, announcing a $3.44bn profit. Additionally in the US, June retail sales and the producer price index were better than anticipated thus resulting in investors’ buying into riskier currencies as optimism grew over the state of the global economy.
  
• Goldman Sachs’ report has increased confidence in the markets however investors are remaining cautious ahead of earnings reports from JP Morgan and Citigroup later this week.
  
• There are no announcements due out in New Zealand today, whilst in the UK there are jobless claims data due at 09.30 BST.