Market News Detail

October market commentary

Sterling Overview

It has been another roller-coaster month for sterling as GDP data released showed that the UK economy contracted by 0.5% in Q3 compared with the previous quarter.  This is the first contraction since Q2 1992 and the biggest quarterly fall since Q4 1990.  The market consensus had been for a 0.2% decline and the pound weakened significantly following this data release.  Although the UK is not technically in recession (2 quarters of negative growth) both Gordon Brown and Mervyn King, Governor of the BoE (Bank of England) have now spoken about the possibility of a recession, something they had been reluctant to do.

The BoE's MPC (Monetary Policy Committee) coordinated a rate cut along with 5 other central banks including the ECB (European Central Bank) and Fed (US Federal Reserve) and interest rates were reduced by 0.5%.  It is now expected that the BoE will reduce interest rates further when they meet later this week, most likely by 0.5% although there have been a number of calls for a larger cut.

Recent consumer confidence data has been published at its lowest level since 1974 as households worry about the financial turmoil and the outlook for employment.  On a more positive note mortgage approvals recently hit a twelve month high, which indicates lenders are finally opening their mortgage books again.

In the short-term we expect the pound to remain under pressure given the strong possibility of an interest rate reduction, although many issues facing the UK also face the euro zone and US.  With this in mind markets are likely to remain volatile with potentially some quite large daily swings.

GBPEUR

The ECB meet later this week to announce their decision on interest rates, although it is anticipated that they will cut rates again following a 0.5% cut last month.  ECB members will be scrutinised for hints of the likelihood and magnitude of future rate cuts.  President Trichet last Monday signalled the possibility of a cut this week, an outcome that seems even more likely given the recent series of very weak confidence data and the fall in euro zone CPI inflation.

GBPUSD (Cable)

The Fed slashed interest rates last week to 1% and whether more rate cuts are on the cards before year-end may depend on the outcome of the October employment report on Friday.  Despite a reduction in the US base rate, which would normally devalue a currency, the fall in oil prices coincided with huge purchases of dollar-denominated assets has seen the dollar rally in recent weeks against both the pound and euro.

GBPCAD (Loonie)

The BoC (Bank of Canada) was one of 6 central banks that opted for a coordinated rate cut of 50 basis points last month bringing the Canadian base rate to 2.25%.  We have seen some favourable buying opportunities as oil prices have reduced devaluing the loonie, although GBPCAD still remains within a very broad trading range.

GBPZAR (South African rand)

Interest rates remain at 12% in South Africa although October has seen a huge movement on GBPZAR currency pairing with buying levels above 18.00 and selling levels below 15.00.

GBPAUD (Australian dollar)

A surprise 100bps cut in interest rates led to 5% fall in value versus GBP early last month.  The surprise move coincided with a massive sell off of Aussie dollars as unwinding of carry trades meant the dollar saw losses of more than 10% on some days.

GBPNZD (New Zealand dollar)

Following the 1% reduction in interest rates by the RBA (Reserve Bank of Australia), the RBNZ (Reserve Bank of New Zealand) also acted and slashed their base rate to 6.50%, a 1% reduction.  Also, like the Aussie dollar the Kiwi dollar lost much value on the unwinding of carry trades and at one stage hit 3 dollars to the pound.  The market has since fallen back but levels still remain favourable for UK buyers.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800