Sterling Takes a Tumble

June 5, 2009

Sterling had the equivalent of a Bad Hair Day yesterday on the foreign exchange market. Even though we had been expecting Sterling to ease during the day and overnight, the magnitude of the drop was quite surprising. Several factors compounded the situation, culminating in an early afternoon rumor that Gordon Brown had resigned. Ongoing technical now look for a test of the strong Sterling support zone between 1.5800 and 1.5500.

Today’s main interest will be on the UK Cabinet reshuffle (last throw of the dice perhaps) and US non-farm payrolls. It looks likely that Alistair Darling will hold on to his job as Chancellor but most other posts will change stewardship. Whether this is sufficient to appease an electorate rapidly losing faith in the Government or the party faithful who appear to be losing confidence in Gordon Brown as we get nearer and nearer to a general election.

All this will cause overseas holders of Sterling to fret over the short term prospects for Sterling although maintaining Darling in the Treasury should add some degree of comfort (not that he is deemed overly good but that he is likely to be an awful lot better than the alternatives).

Non-farm payrolls this afternoon are expected to show another month of increasing lay-offs with approximately 500K expected to be reported. This could very well see the unemployment rate rise to 9.1% and cause the recent Dollar buying to be reversed as we approach the weekend.

Yesterday was Central Bank Day which saw the BoE produce exactly what had been expected – Nothing. The ECB however, gave the market a little bit more to chew over. Although they left rates unchanged at 1%, they revised their estimates for the fall in the annualised rate of Eurozone GDP to around 5.1% rather than a maximum drop of 3.1% that was predicted just 3-months ago.

The Central Bank also announced that it was proceeding with its limited ‘credit easing’ through the buying of Euro 60 billion of covered bonds. It sounds impressive but represents just 0.6% of Eurozone GDP which, when compared with the UK and the US attempts at QE (9% and 12% of GDP respectively), looks a feeble attempt at a stimulus.

Elsewhere, investors remain focused on the Baltic States and the condition of their economies. The Latvian Central Bank confirmed its commitment to the Lat’s peg value versus the Euro but the market is still very unsure. This maintains pressure on Sweden, the Swedish currency and their Bank’s in particular.

Report by Mark O`Sullivan

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