Currencies Direct Reviews the Beleaguered Pound
2, November 2009
Yesterday the pound slowly filtered lower as the markets digested the uncertainty surrounding the Bank of England rate decision and the upheaval of the UK banking sector. Against the USD, the pound initially started well before retreating a cent overnight to 1.6290. Against the euro it failed to hold the 1.11 retreating to 1.1050. GBP/JPY has now fallen to 146.75 as the market loses confidence in sterling. The question is will this continue and if so to what extent?
The main issues for the pound are recurring themes, namely further expansion of QE by up to £50 billion on Thursday and the UK’s dire public finances. 1.60 against the USD and 1.10 against the euroare key levels for sterling to hold this week.
Into the mix we also have the changes to the UK banking sector. Lloyds banking group plans to raise £21 billion to avoid government majority control. RBS group said it will sell its insurance division and some branches as it agreed to take an additional £25.5 billion from the government to covet the title of the most expensive bailout in the world. Chairman of the FSA Lord Turner has stated in the Telegraph that splitting the banking sector could create more risk, exactly what they are trying to avoid. He added that dividing the “casinos” from retail banks is too simplistic a solution. This debate, uncertainty and change to the banking sector could start to weigh on the pound in the short term.
Moving away from the UK we have seen a decent run of economic data around the globe as the drive to recovery continues. In the US yesterday we saw ISM manufacturing, pending home sales and construction spending all beating expectations. This produced a push higher on the risk trade and led to initial USD weakness with EUR/USD pushing towards 1.48 and GBP/USD holding above 1.64. This faded in later trading as sterling started to suffer. The better than expected US data will raise the prospects of a good payroll number on Friday.
Australia raised interest rates by 25 basis points as expected. Recent positives in Australia had created a call for a rise of 50 basis points and his may explain the weakness in the AUD after the decision.
Report by Phil McHugh
Currencies Direct is a leading commercial foreign exchange company with offices in the UK, Australia and Spain and has offices across 5 continents. Currencies Direct’s head office and global trading centre is based in the City of London.
The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
Compiled by Tom Nadir.
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