By Jon Beddell
Foreign Currency Market Update – GBP / USD Update
The US dollar exchange rate spent October on the back foot as stock markets rebounded sharply from the late summer sell off. As investors waded back into stocks and riskier assets, demand for safe haven currencies waned, driving the dollar’s value lower. This was always a move driven by risk appetite rather than any particular desire to hold Sterling. Since the month end this move has appeared to run out of steam and we now see Sterling/Dollar trading back towards 1.58, three cents off the recent highs. There has been a marked increase in volatility over the last two weeks as events in Europe continue to dominate the headlines. Regime change in both Greece and Italy has done little to calm markets if appetite for the Dollar is anything to go by, although it should be noted that Italian bond yields have dipped from the 7% level that caused alarm a couple of weeks ago. Investors still demanded 6.29% in a €3bn auction of new bonds yesterday, the highest level since 1997 and a full percent higher than a similar auction just one month ago. Once investors start demanding those sorts of returns, serious questions are asked about the credibility of the issuer. A move above 7% is what triggered the collapse of the Greek bond market, and markets are highly sensitive to the prospect of a possible repeat performance from Italy.
The Bank of England kept interest rates on hold at 0.5% last week, as well as the volume of quantitative easing. Producer price inflation showed a slight moderation to 5.7% year on year, and this morning’s closely watched retail price index also slipped to 5.4% from 5.5% last month. On the whole this is negative for Sterling as any sign of moderating inflation is likely to keep the Bank of England from raising interest rates. This is especially true when all signs point toward a sluggish economy. In terms of data to watch for this week the main course will be the Bank’s quarterly inflation report accompanied by a speech from governor Mervyn King at 10:30 on Wednesday.
Given the distinct weakening in Sterling’s latest upswing buyers of the Dollar should consider covering at least half of any exposure at current levels.
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