Currency Update – Thursday 16th April

After some improved UK housing data, Sterling made strong gains against both the Dollar and the Euro yesterday, rising around a cent against both. Against the Dollar, Sterling rose above 1.50 for the first time in over 3 months, only curtailed overnight by the release in the UK of the British Retail Consortium’s sales monitor, showing further year-on-year declines for March. This brought GBPUSD back hovering above 1.4950. With the Eurozone pre-occupied with problems of its own, this news didn’t serve to pull back the gains made on the Euro, with GBPEUR settling around 1.1350, its highest in around 6 weeks. The Euro’s woes were compounded yesterday by comments from within the ECB suggesting that a package of ‘non-standard measures’ would be announced at the next meeting in May, essentially the quantitative easing measures already seen in the UK.

Those of you believing that GBPUSD breaking through the 1.50 mark heralds an important longer-term psychological level should heed the comments made by the head of the NYSE, that the recent surges in US stocks may be little more than a temporary bear-rally. If, as he suggests, US stocks slip back, the safe-haven appeal of the Dollar will return and this will reverse some of the gains made by Sterling recently. Indeed, several more leading US banks will release earnings figures by the end of the week, with trepidation returning to the markets despite the positive results from Goldman Sachs earlier in the week. Adding further strength to the Dollar last night was the release of the Fed’s ‘Beige Book’, which contains anecdotal reports on the US economy, with many authorities suggesting that the pace of decline is beginning to slow.

With the BRC sales monitor the lone exception in an otherwise empty week for UK data, the markets today look again to the US and Europe for direction, with the US providing data on building permits, housing starts and jobless claims, and data from the Eurozone on CPI and industrial production. Industrial production is expected to show the pace of decline slowing, though this may be overlooked in light of the expected rate cuts and QE announcements from the ECB next month. In the US the data releases are expected to be largely unchanged from last month. Looking ahead, the biggest event for Sterling is undoubtedly the Budget next week, and with Alistair Darling expected to dampen our recent upbeat outlook for the UK, it seems next wednesday may provide more bad news than good for Sterling.

Jonathan Smith | Assistant Manager, Treasury Solutions UK