Market News Detail

Sterling makes (small) comeback in Foreign Currency Market

Sterling Overview

This first week of September has seen sterling claw back some of the losses sustained in August.  Unfortunately, the pound weakened sharply early last month following an announcement from the BoE (Bank of England) that it planned to inject a further £50bn into the UK economy.  Preceding economic data had indicated the BoE may stop its QE (Quantitative Easing) programme at £125bn, which had provided support for the pound as it neared 9 month highs against both euro and US dollar, although these highs were to be short lived.

Following a statement from the BoE, sterling dropped into lower trading ranges and struggled to regain losses incurred.  This week however, the UK economy has shown more promising signs with mortgage approvals continuing the upward trend seen since the end of last year and in the services sector, PMI came in at 54.1 up from 53.2 in July, above forecast.  In addition the business expectations index recorded its highest reading since August 2007 coming in at 72.3 for August, up from 69.3 in July.

It was not all one way traffic as net lending fell in July at its sharpest pace since records began in 1993 and UK manufacturing PMI contracted, which led to a sharp sell-off in sterling putting the pound under some pressure earlier in the week.

Sterling seems likely to remain within its recent trading range, albeit a broad one, as there is little to suggest a significant movement in the short-term.  Despite some sectors of the UK economy displaying signs of improvement the overwhelming level of national debt seems to be holding back the UK economy from a quick recovery like we have seen in both France and Germany.

GBPEUR

As expected the ECB (European Central Bank) kept rates on hold at yesterdays meeting although the euro was not helped by a negative weighted tone in the statement that followed.  The ECB upgraded their forecast for growth although there was a distinct undertone of caution.  Earlier in the month the euro had benefitted from news that the ECB is unlikely to be adding to their QE programme, quite the opposite to the BoE.

GBPUSD (Cable)

At Wednesday's FOMC meeting the Federal Reserve kept interest rates on hold as widely anticipated and continued to maintain a stance that rates will remain low for some time despite improved economic conditions.  Non Farm payroll data showed -216,000 compared with a forecast of -233,000 aiding the dollar slightly although the unemployment rate crept up to 9.7%, 0.2% above market forecast.

GBPCAD (Loonie)

The Reserve Bank of Canada meets next Thursday to decide on interest rate direction although we do not anticipate any change from the current rate of 0.25%.  The Canadian dollar is one of the few currencies that the pound has maintained a reasonable position against.  Just today, Canada has published positive employment data with the creation of 27,000 new jobs against a market prediction of -20,000 jobs again increasing the value of the Canadian dollar.

GBPZAR

The rand moved more than 8% against the pound in recent weeks and has moved dangerously close to R12.5.  South Africa's inflation eased from +6.9% to +6.7% in July and could have been less had it not been for the high cost of electricity.  Nevertheless, analysts believe inflation is bottoming out and there is less chance of further reductions to South Africa's base interest rate.  Whilst sterling maintains a level above R12.5 the prospect of a short-term recovery is still there.

GBPAUD

The UK currency has struggled against the Aussie dollar as investors risk appetite increased.  With interest rates at 3% in Australia, they are 0.5% better than New Zealand and well ahead of what Western Europe and Northern America can offer.  GBPAUD is currently sitting near to a 13 year low.

GBPNZD (New Zealand dollar)

As mentioned above, the Kiwi dollar like the Aussie dollar is close to a 12 year low following the return of risk appetite and the higher interest rates offered.  It is this reason that the dollar has seen such favourable gains rather than economic performance in New Zealand.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800. Nothing in the newsletter should be construed as advice or guidance as to when to buy or sell currency.