Sterling Remains Under Pressure

July 9, 2009

Yesterday sterling remained under pressure for the trading day as the prospect of increasing the QE programme was priced into sterling. As is common on interest rate decisions, the speculation beforehand will move the value of the currency before the actual announcement.

Sterling clung to its current trading range against the USD and the Euro but only just; in afternoon trading we briefly saw a test of the 1.60 level against the USD before sterling managed to fight its way back to 1.61; against the euro it dipped to 1.1550 but did not threaten the 1.15 level. This morning sterling has hopped up against the USD so a good start to the day for sterling but it is not out of the woods yet.

Later today the Bank of England are set to confirm the increase in QE but it will be the accompanying statement that will be key. The risk for sterling is if the door is left open for further expansion of the QE programme going forward. We will find out this afternoon!

The Yen has been very active against most major currencies this week advancing strongly against the USD and the pound. Currently we sit just over 150 on GBP/YEN and 93.33 on USD/YEN. The pull back into Yen is not surprisingly attributed to fading optimism on an economic recovery and a move out of risky assets in line with this sentiment. The Japanese authorities unsurprisingly expressed concerns over the undesireable strength of the YEN; a bit of verbal intervention.

The move out of risk is clear when looking at the CRB index which is a broad index of commodity prices; the CRB is down more than 12% from last month pushing below its 200 day moving average. This is a clear signal that the recent rebound is over. This also highlights a swing back into deflationary pressure due to falling prices and stalling economic activity This will alarm central banks and could be a factor for the Bank Of England this afternoon to leave the door open for more QE.

Data from Australia confirmed that June unempoloyment came in marginally better than expected at 5.8% against a forecast of 5.9%. Not a key stat but a hint of good news amid the gloom. The G8 statement offered no mention on currency. Comments affirmed that the recession is the steepest since World War II and too fragile still to consider looking at exit strategies for stimuls measures.

President Obama actually pressed for the door to be left open for further stimulus measures. Gordon Brown said “the G-8 needed to sound as second wakeup call for the world economy”, the concern of a relapse is a strong theme from the G8.

Report by Phil McHugh

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