The Pound performed audaciously well on Friday, improving across the board – bar the Euro.
• GBP/EUR falls to 3-month low – on ECB and Fed stimulus.
• Stocks rally – risk appetite improves.
• GBP/USD rises – breaches 1.6200
• UK economic outlook improves – Q3 growth expected.
The Pound performed audaciously well on Friday, improving across the board – bar the Euro. It seems that improved construction data has caused second quarter growth estimates to increase slightly from -0.5% to -0.4%. Powerful Industrial output figures during July suggest that the UK economy may be set to expand at a rate of around 0.6% in the third quarter. These two seismic shifts in Sterling sentiment have positively impacted the Pound as it grows against both the safe haven and risk-driven currencies.
For the first time in 11 months the Eurozone Consumer Price Index figure accelerated as rising fuel costs sent the headline inflation figure higher. CPI increased to 2.6% on an annual basis within the currency bloc, but the statistic held little sway in terms of the Sterling / Euro exchange rate which fell to a 3-month low of 1.2325.
An important meeting between Eurozone finance ministers in Cyprus passed with an unfamiliar feeling of optimism as Central Bank efforts endeavoured to improve the value of the common currency. The European Central Bank’s bond intervention plan remains a constraining force on peripheral Eurozone bond yields, and the Federal Reserve’s latest asset purchasing scheme has breathed new life into markets – both of which have helped improve sentiment towards the single currency.
The Pound grew by over a cent against the US Dollar on Friday to reach a fresh 4-month high of 1.6255 as the ‘Greenback’ continued to lose out on renewed optimism in the global economy as a result of the European Central Bank’s bond-buying proposal and the advent of a third round of quantitative easing from the Federal Reserve.
The open-ended nature of the Fed’s latest easing programme has proved particularly popular with markets, which has led to the Pound’s extensive gains since the scheme was announced. The Fed will purchase $40 billion of mortgage-backed assets every month until the labour market in America is seen to have significantly improved. The problem for the US Dollar, which relies on safe haven flows, is that with no explicit target the Fed’s easing cycle could potentially last for a very long time. It appears that the Central Bank has put its full force behind the US economy and investors have reacted accordingly.
The Pound approached tough resistance levels in the region of 1.5780 against the Canadian Dollar on Friday as huge stock market rallies enacted to leave Britain’s biggest companies £25 billion better off. With growth revisions and economic projections taking a turn for the better, Sterling managed to post a daily gain of just over 1 cent.
Sterling appreciated by 1.1 cents against the Australian Dollar on Friday despite the Antipodean currency’s profitable interest rate differential, which would ordinarily carry the ‘Aussie’ higher against the Pound during times like this of enhanced economic confidence. It is also possible that news of the Eurozone finance ministers’ smooth meeting in Cyprus could have supported the Pound as a result of the UK’s extremely close trade partnership with the 17-nation bloc.
New Zealand Dollar
The Pound’s 1.4 cent gains against the New Zealand Dollar can be attributed to a very similar set of rationale to that of Sterling’s strong performance against the Australian Dollar: strengthening outlook for the UK financial system; British stock market rallies; and profit-making stances following Thursday’s knee-jerk reaction to sell Sterling versus the Antipodeans.
Data Released Today
14:00 CAD Existing Home Sales (MoM) (AUG)
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