European bond yields have dropped off steadily over the last week or two, which effectively brings the sovereign debt crisis back to an uncomfortable simmer.
By Jon Beddell
Foreign Currency Market Update – GBP / USD Update
Sterling entered the New Year in bad form. We were languishing close to 18 month lows around 1.53 with no apparent direction. In fact the last three months have been choppy and trendless, and with much of the focus on Europe and the sovereign debt issues there, no real catalyst has been evident to prompt a major move in the Sterling/Dollar market. That remains the case now. With European bond yields drifting lower it could be said that focus is at least temporarily blurred compared with a few weeks back when Italian yields hit 7% (the level that triggered the Greek meltdown), which leaves some room for other themes to enter the picture.
There were a few noteworthy snippets from last week. The inflation beast is at last looking a little tamer, with core price inflation dipping to 4.2% from 4.8% last month, and retail prices taking a similar dip to 4.8% from 5.2%. Further moderation is expected as a result of last year’s VAT increase falling out of the comparatives from January. Comparative measures in the US also dipped a little with consumer price inflation down ten basis points to 3.0%. UK unemployment ticked higher to 8.4%, while US jobless claims were lower than expected in the early part of January. If anything drove the Dollar last week it was generally buoyant stock market trading which helped whet risk appetite and drive flows away from safe haven currencies into riskier assets like the Aussie dollar and to a lesser extent Sterling.
*Denotes the importance of the data item *** being the highest level.
**The UK’s latest public borrowing figure for December is out on Tuesday with £13.4bn of borrowing expected.
***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).
***US interest rate decision on Wednesday evening.
**Durable goods orders on Thursday (market is expecting +2%)
**Leading indicators on Thursday (this is a measure of overall economic activity and markets are expecting a figure of 0.7%)
European bond yields have dropped off steadily over the last week or two, which effectively brings the sovereign debt crisis back to an uncomfortable simmer. Italian yields went well above 7%, the level that triggered total meltdown for Greece, but currently trade back around 6.15%. The Euro has rallied a couple of cents against the US dollar and at least halted its slide against the Pound since the New Year. Risk appetite is improving and with that the US Dollar tends to fall. However, Sterling has been confined in a relatively tight range over the last few weeks and we would need to see a clear break above 1.56 to become more optimistic from a technical perspective.
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