Another day another Dollar for Sterling yesterday as the Pound appreciated against all of the major currencies
• GBP/EUR stabilises – above 1.2400.
• Sterling outperforms all of the majors – on domestic improvements and favourable market conditions.
• GBP/USD grows – heading towards yearly highs at 1.6306.
• Australian growth fragile – relying on pick-up in China and commodity prices.
Another day another Dollar for Sterling yesterday as the Pound appreciated against all of the major currencies. Sterling sentiment has risen through the roof over the past few weeks due to domestic improvements and high profile stimulus measures in Europe and the US. The move from the Federal Reserve to buy-up lots of mortgage-backed assets has given players in the financial markets a boost in confidence, which has supported the UK currency. The European Central Bank’s decision to launch a bond-buying programme has also bolstered the Pound as it has led to larger trade volumes in the Eurozone, the UK’s closest trade partner.
German Chancellor Angela Merkel gave her annual press conference yesterday where she addressed the future of the Eurozone and made the unlikely claim that her “heart bleeds” for the suffering in Greece. Merkel urged European leaders to join together in order to increase political coordination across the region and stated that peripheral states must continue with the harrowing task of economic reform to help balance the Eurozone economy.
The Chancellor, dubbed the ‘Iron Lady of Europe’ by some, stressed her desire for Greece to remain in the currency bloc as long as the Hellenic nation sticks to its fiscal consolidation targets. Regarding the situation in Italy, Merkel did not mention anything to do with the ESM or the ECB’s bond-buying scheme, nor did she sympathise with the people of Italy with such visceral language as she deemed appropriate for the Greeks. Merkel also spoke of the European Central Bank, and the disgruntled Bundesbank Chief Jens Weidmann; she said that Weidmann’s opposition came as a result of his honourable desire to solve the crisis in a sustainable way.
The Pound grew by around 0.4 cents against the Euro yesterday as reluctance for leaders to sign up to the ECB’s bond intervention scheme sent 10-year bond yields in Spain back over 6.0%.
The Pound to US Dollar exchange rate reached a fresh 4.5-month high of 1.6274 yesterday as the Fed’s latest stimulus programme continued to take Sterling higher.
Any bout of quantitative easing is potentially damaging to the value of a currency because when you increase the supply of money, you decrease its value. The Fed will effectively be decreasing the value of the US Dollar with $40 billion extra each month for the foreseeable future. As markets begin to price this phenomenon into their valuations of the Pound against the US Dollar they also have the US currency’s safe haven status to take into account.
Because the US Dollar is the world’s reserve currency, it stands to benefit when times are tough economically; under dire circumstances the ‘Greenback grows, but under positive global market sentiment the US Dollar is liable to depreciate as traders look for more risky but more profitable investments. What we are seeing now is a classic case of US Dollar depreciation at the hands of the Federal Reserve’s quantitative easing programme.
Existing Home Sales in Canada declined at the fastest rate in over 2 years during August, as stricter lending conditions brought in by the Federal government have negatively impacted the statistic. Sales slipped by -5.8% after holding steady at 0.0% in July. This relatively weak figure contributed to the Pound’s bullish 0.8 cent rally against the Canadian Dollar yesterday.
The Reserve Bank of Australia opted to maintain its benchmark interest rate at 3.50%, the highest rate of the majors. Governor Glenn Stevens noted that growth in Australia has been fairly steady with labour market conditions holding strong and domestic consumption improving mildly. However the RBA struck a slightly dovish tone with regards to the situation in China and the falling price of Iron Ore – Australia’s primary commodity export.
The Pound fell by 0.4 cents against the Australian Dollar in reaction to the minutes report, but the initial relief rally was short-lived and Sterling pushed on to mark a daily gain of 1.4 cents.
New Zealand Dollar
Defying traditional risk trends the New Zealand Dollar has been unable to capitalise on the recent Central Bank stimulus efforts from the ECB or the Fed. Sterling appreciated by just under 1.5 cents against the New Zealand Dollar yesterday despite the notion that enhanced market sentiment should support the high-beta currency. Falling commodity prices and domestic strength in the UK economy seem to be the main causes as GBP/NZD retracts May-August’s losses.
Data Released Today
09:30 GBP Core Consumer Price Index (YoY) (AUG)
10:00 EUR German ZEW Survey (Economic Sentiment) (SEP)
13:30 USD Current Account Balance (2Q)
23:45 NZD Current Account Balance (2Q)
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