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Large gains for sterling in the Foreign Currency Exchange markets

Market CommentaryLarge gains for sterling in the Foreign Currency Exchange markets

Sterling Overview

The last time I wrote a currency exchange market commentary there was a vast amount of doom and gloom in the media about how poor the UK economy was. Now we have the reverse and the Governor of the Bank of England, along with other MPC Members, are trying to dampen down expectations that we are seeing signs of a recovery. Either way in May sterling has hit 2009 highs against both euro and US dollar.

Without making a wide generalisation, foreign exchange rates tend to fluctuate on economic and political data. However recently we can link the gains in equity markets directly to the appreciation of sterling as investors are becoming less risk averse, or as an economist said, cautiously optimistic. Rightly so if we consider that only last month the Bank of England increased quantative easing by a further £50bn and UK unemployment is still rising fast, hitting over 2.2m.

Why the change in confidence? Well hopefully this is not a short-term blip although you could attribute this to the more normal functioning of credit markets with UK libor rate falling to 1.28% last week. Personally I would tend to follow the economist who is cautiously optimistic as you cannot ignore the fact that there are positive signs; house prices seem to have bottomed out, mortgage lending increasing and business / consumer confidence returning.

However the foreign exchange market is still fragile and if we have negative data then we could see the recent gains wiped out. So for a more detailed overview please speak to one of our currency dealers directly.

GBPEUR

The ECB (European Central Bank) will announce this Thursday the latest decision on interest rates, with the market expecting rates to remain on hold at 1%. However, as economic data from major countries in the eurozone continues to disappoint, we could have a surprise if the ECB decides it needs to take more decisive action.

GBPUSD (Cable)

Current opinion from many foreign exchange analysts suggest that the US may recover from recession much quicker than anticipated, perhaps as early as Q3 this year. This makes the recent weakness in US dollar somewhat confusing, in the sense that a strengthening economy should offer support to a currency. Therefore if they are right we could begin to see this weakness corrected, and Lloyds TSB Chief Economist is forecasting dollar to gain against sterling by end of 2009.

GBPCAD (Loonie)

Canada is the latest G20 economy to confirm it is officially in recession, after two consecutive quarters of negative growth. Despite this sterling has struggled to make any meaningful gains against the loonie, most likely due to the fact that rising oil and commodity prices has protected the Canadian dollar.

GBPZAR

Recently the South African rand has been one of the strongest emerging market currencies, helped considerably by the rise in commodity prices. Furthermore Jacob Zuma was sworn in as President following ANC’s victory in the recent elections offering further support to the rand.

GBPAUD

Australia’s economy grew 0.4% last quarter on agricultural exports, fiscal and monetary stimulus defying the global recession. This has meant sterling remained very weak against the Australian dollar throughout May, with no signals yet of an improvement for buyers of the Australian dollar.

GBPNZD (New Zealand dollar)

Unlike Australia, New Zealand is in recession and the NZ Institute of Economic Research has forecast the recession to last until end of 2009. However they have also stated that whilst the New Zealand dollar remains strong the economy will not recover as quickly as an expensive dollar will hamper export markets.

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.

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