Currency Update – Wednesday 21st January

Currency Update – Wednesday 21st January

Good morning,

Sterling continues to fall, as worldwide stock markets suffer and drag down risk appetite, which is also hurting the AUD and the NZD, but Sterling has fared the worse. The historic safe haven currencies, the Yen and the Dollar,  have benefited, with the Dollar also buoyed by the large scale spectacle of the inauguration of their new President. However the new President's lofty rhetoric failed to provide the 'Obama bounce' some expected, as the S&P500 slide over 5%, led by a fall in financial stocks, weighed down with yet another barrage of poor corporate news, with one institutional fund manager announcing a $10bn loss. UK equities have also suffered and again it is the financial sector which led the move downwards, with most banking stocks falling by double digit percentages for a number of days in a row. If the Government thought it's 2nd attempt at a bail out plan would help stabilise the banking sector they were wrong, it has instead brought to light just how uncertain the banks are over how much losses are still on their books.

The Government bail out plan has also led to fears over UK government funding requirements, with rumours of a possibility that, like Spain, the UK may have it's credit rating downgraded which would make it much harder, and more costly, to raise the necessary funds for the bail out. There are also concerns that 'quantitative easing' may be around the corner with the UK government creating money to fund the buying of bank assets. With all the doom and gloom yesterday the CPI inflation rate coming in higher than many expected, at 3.1% rather than 2.4%, barely made a blip in the currency markets, only briefly halting Sterling's slide downwards. Sterling has fallen below $1.38 this morning against the Dollar, and below €1.07 against the Euro, it has also fallen to a record low below Y124 against the Yen.

The immediate future looks bleak for Sterling, many thought that the GBP/EUR rate would start to climb as the markets woke up to how much trouble the Eurozone economies were in, however the markets have woken up and the Euro has weakened, falling below 1.29 against the Dollar, however the problems with the UK banks, and expected problems with the UK governments own financial health, have still led the Pound lower against the single currency. The next big level for Sterling versus the Dollar is 1.3682, a level which if beaten would be a 21 year low for Sterling, and could precipitate a move further lower, with no technical levels to give it support. If the rumours of the downgrading of the UK's credit rating prove correct, then Sterling could easily break through this level, and through the all time low in GBP/EUR, however it may not even take that to get GBP/USD through the 21 year low as the below graph shows, Sterling is in a declining range with support down below 1.35.

We have a couple of important releases for the UK today, in the form of the latest unemployment figures, and the minutes from the last MPC meeting. The unemployment benefit claimant count is expected to rise by 81k, although the risks are that it could be even higher, which is hardly likely to give the Pound any support. Something that could possibly give Sterling some reprieve is the MPC minutes, if these prove more hawkish than expected it could help the Pound, however as the statement, released along with the 50bp cut at the last meeting, seemed to indicate a pause in the rate cutting cycle, then the minutes would have to be more hawkish still, so again the risks are more towards a dovish set of minutes, and yet more woes for Sterling.

Michael Corcoran - Assistant Manager  | Treasury Solutions

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